In July 2025, the Government published its response to the consultation on proposed changes to the Inheritance Tax (IHT) treatment of unused pension funds and lump sum death benefits. This marks a major step forward in reforming how pensions are assessed for IHT – and potentially reshapes how clients should plan for retirement and legacy.
What Was the Consultation About?
Launched in late 2024, the consultation explored whether unused defined contribution pensions and certain lump sum death benefits should be brought into an individual’s estate for IHT purposes. This followed concerns that pensions had become a loophole for IHT avoidance, with some clients preserving pensions and spending other assets to reduce estate tax.
The proposed changes have now been confirmed for introduction via the next Finance Bill, with implementation set for 6 April 2027.
Key Outcomes from the Government's Response
1. Unused Pension Funds Will Be Subject to IHT
From 6 April 2027, unused pension funds will form part of the deceased's estate for IHT purposes – even if not yet accessed. This will apply to:
Uncrystallised funds
Drawdown pots
Certain lump sum death benefits
Exemptions apply where benefits are paid to a:
Spouse or civil partner
Qualifying charity
Death-in-service arrangement
2. Responsibility Shifts to Personal Representatives
Rather than the pension scheme administrators handling tax, it will now be up to executors/personal representatives to:
Declare pensions in IHT calculations
Allocate the nil rate band accordingly
Pay any IHT due
HMRC will be releasing tools and calculators to help with this in due course.
3. Timing Matters – April 2027 Is the Key Date
These changes apply only to deaths occurring on or after 6 April 2027. This creates a planning window between now and then to take action and adjust client strategies.
What This Means for Clients (for you)
Legacy Planning May Need a Rethink:
Many clients have historically treated pensions as a tax-efficient vehicle for inheritance. That strategy may now need revising, particularly if the aim was to pass on a significant pension pot to children or grandchildren.
Dual Tax Hit Risk
If someone dies after age 75, beneficiaries may now face both:
IHT on the value of the pot, and
Income tax when accessing the inherited funds
Depending on individual circumstances, this could mean an effective tax rate of 55–70% in some cases.
How We’re Helping Clients Prepare
At Financial Design, we’re already working with clients to review:
Pension and investment withdrawal strategies
Gifting opportunities (including “normal expenditure out of income”)
Use of trusts or life cover to offset potential tax liabilities
Expression of wish and beneficiary nomination forms
Now is the ideal time to begin planning – not after the legislation takes effect.
Next Steps: What Should You Do?
Book a Review – If your estate includes pensions, we can assess the potential IHT impact.
Review Your Beneficiaries – Make sure your wishes are up-to-date and tax-efficient.
Explore Withdrawal Strategies – You may benefit from drawing down sooner, or gifting income now.
Stay Informed – We’ll continue to keep clients updated as the Finance Bill progresses later this year.
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Please note this is for general information only and is based on Financial Design's understanding of the relevant legislation and regulations and may be subject to change.
The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.
Financial Design (IFA) Ltd accept no liability for any damages, losses or causes of action of any nature arising from your use of reviewing this latest blog.
If wish to get in contact due to the recent effects of the consultation period then please click on the 'Get in touch' below.
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