IHT: Pension Death Benefits from April 2027

One of the most significant pension tax changes affecting business owners in recent years is the inclusion of most unused pension funds within the Inheritance Tax (IHT) regime from 6 April 2027. For those with substantial pension wealth, particularly within a SSAS, the impact on family wealth and succession planning could be considerable.

From 6 April 2027, most unused pension funds and pension death benefits will be brought into account for Inheritance Tax (IHT) purposes, representing a significant change in how pensions are treated on death.

For years, pensions have played an important role in estate planning because discretionary pension death benefits have generally sat outside an individual's estate for Inheritance Tax purposes.

From April 2027, that distinction changes substantially.

The changes were introduced through the Finance Act 2026 and apply to deaths occurring on or after 6 April 2027.

It is important to note that the new rules depend on the date of death. Where a pension scheme member dies before 6 April 2027, the current rules generally continue to apply, even if death benefits are paid after that date.

What happens under the current rules?

At present, pension death benefits are frequently outside an individual's estate for Inheritance Tax where scheme trustees or administrators have discretion over who receives the benefits.

As a result, substantial pension assets can often pass to beneficiaries without automatically being included within the estate for IHT purposes.

However, the position is not universal. Some non-discretionary pension arrangements and death benefits are already capable of being included within an individual's estate for Inheritance Tax purposes under the current rules.

This distinction has significantly influenced the way many families have approached retirement and estate planning over recent years.

What changes on 6 April 2027?

For deaths occurring on or after 6 April 2027, most unused pension funds and pension death benefits will be included when determining the value of an individual's estate for Inheritance Tax purposes.

This represents a major departure from the existing framework, as inclusion for IHT purposes will generally apply regardless of whether trustees exercise discretion over the payment of death benefits.

However, not every pension-related benefit will be affected. Certain benefits, including registered pension scheme death-in-service benefits, will remain outside the estate for Inheritance Tax purposes.

Equally, this does not mean every pension fund will be subject to a 40% Inheritance Tax charge.

The ultimate IHT liability will depend on the value of the overall estate, available allowances, exemptions and the beneficiaries involved.

For individuals with significant pension assets, however, the change could materially increase the value brought into the IHT calculation.

What about a spouse or civil partner?

An important exemption remains in place.

Where pension death benefits pass to a surviving spouse or civil partner and the relevant exemption applies, those benefits remain exempt from Inheritance Tax.

The new rules therefore do not remove the spouse or civil partner exemption.

However, the position can look very different where pension wealth ultimately passes to children, grandchildren or other non-exempt beneficiaries.

This is why the change needs to be considered in the context of the family's wider estate, rather than viewing the pension in isolation.

Who will deal with the Inheritance Tax?

Another important change concerns administration.

Personal representatives, usually the executors responsible for administering the estate, will primarily be responsible for reporting and paying any Inheritance Tax due in respect of pension funds and death benefits.

Pension scheme administrators will also have new information-sharing and payment responsibilities.

There will be mechanisms that allow IHT attributable to pension benefits to be paid directly from pension funds in appropriate circumstances.

For families dealing with multiple pension arrangements alongside the wider estate, this could create significantly more administration at an already difficult time.

Does this affect SSAS pensions?

Yes, because SSAS arrangements are often central to the wealth of owner-managed businesses, the inclusion of unused pension funds within the IHT calculation may have a greater impact on business owners than on many other investors.

A director may have spent decades building value within their pension.

A SSAS may hold investments, cash or even a valuable commercial property.

Until now, estate planning may have been based partly on the expectation that discretionary pension death benefits would usually fall outside the estate for IHT purposes.

That assumption should now be reconsidered for deaths occurring from April 2027 onwards.

Should directors start taking money out of pensions?

Not necessarily.

I would be very cautious about responding to these changes by automatically withdrawing substantial pension funds.

Taking money from a pension can trigger Income Tax consequences.

Once withdrawn, those funds may form part of the individual's personal estate anyway.

In addition, the pension remains a tax-advantaged environment during the member's lifetime.

It is also worth remembering that pension death benefits can still carry Income Tax implications in some circumstances, particularly where death occurs after age 75.

A decision designed solely to avoid one future tax charge can therefore create another tax problem.

The appropriate response is proactive planning rather than reactive decision-making.

What should business owners be reviewing?

For directors and business owners with significant pension assets and personal wealth, the period leading up to April 2027 presents an important opportunity to review their overall position.

Areas worth considering include:

• The approximate value of pension assets

• The value of the wider estate

• Existing beneficiary nominations

• Who is ultimately intended to benefit from the pension

• Wills and wider estate-planning arrangements

• The position of a surviving spouse or civil partner

• Other assets held personally or through the business

• How the SSAS fits within the family's long-term succession planning

None of these decisions should be made in isolation.

Pension planning and estate planning are becoming increasingly connected

For many successful business owners, pensions have historically been viewed separately from the rest of the estate.

From April 2027, that becomes increasingly difficult.

If a director has a valuable business, property portfolio, investment assets and a substantial SSAS, their pension may now need to form part of the same estate-planning discussion.

This is particularly relevant for individuals who have traditionally planned to preserve their pension and spend other assets first during retirement.

The legislation does not necessarily mean that strategy is wrong.

It simply means the numbers and objectives should be reviewed again in light of the new rules.

There is time, but this should not be ignored

The rules apply to deaths occurring on or after 6 April 2027.

That gives business owners time to understand the implications and consider their options.

However, effective estate planning rarely happens overnight.

There may be multiple family members, pensions, properties, businesses and existing arrangements that need to be considered together.

For directors with significant pension assets, I would much rather have those conversations well before April 2027 than discover afterwards that a family's planning was built around rules that no longer apply.

At Clear Tax Group, we help business owners review their SSAS arrangements alongside their wider tax and estate-planning position.

If you have accumulated significant pension wealth, now is an ideal time to review your pension, estate and succession plans together. Understanding the potential impact of the April 2027 changes before they take effect may help identify planning opportunities and avoid unintended consequences for your family.

Sharaz Ahmed

SSAS Pension Client Director

Clear Tax Group

This article is provided for general information purposes only and does not constitute personalised financial, pension, investment, legal or tax advice. Tax treatment depends on individual circumstances and may change in future. Pension investments can rise as well as fall in value. Professional advice should always be sought before implementing any pension, property or tax planning strategy. . The tax treatment of pensions and estates depends on individual circumstances, and legislation may be supplemented by further HMRC guidance and future regulatory updates.