Pensions are changing: It’s time to act

On 11 May 2026, HMRC published its Inheritance Tax on pensions: technical note, providing further detail on how the new rules will operate in practice.

At a basic level, it confirms that, from April 2027, most unused pension funds and death benefits will be brought within the value of an individual’s estate for inheritance tax purposes. Given that the Finance Bill received Royal Assent in March 2026, this part is not surprising. However, this technical note provides additional detail that we have not had to date. Below we pick out five interesting observations that we feel will shape retirement planning up to and beyond April 2027.

It is important to note that the observations below are based on our interpretation of information released by HMRC to date. Further detail is expected and changes remain possible, so you should contact your financial adviser before making any adjustments to your retirement strategy.

Administration on death: from simplicity to complexity and conflict

One of the clearest themes emerging from the technical note is the level of administration that will be involved when dealing with pensions that fall into the IHT net.

In short, responsibility will primarily sit with personal representatives (i.e. executors). They will need to identify all pension arrangements, prove their identity, gather information from providers (over two stages), determine whether and how inheritance tax applies and then orchestrate the payment of IHT with the pension schemes and beneficiaries.

With the timescales set out in the technical note, it is difficult to see how PRs will meet the six-month deadline for the payment of IHT. This is likely to lead to higher levels of stress, more costs and potential interest and penalties from HMRC.

In addition to this complexity, we can also see the potential for conflict within families. This is due to the fact that, in many instances, the beneficiaries of the estate (determined by the Will) will not align with the beneficiaries of the pension (still determined by the death benefit nomination). Given that there is some discretion over where the IHT is paid from, one family member could be left financially disadvantaged leading to longer-term conflict in families.

Joint-life Annuities: an option for unmarried couples

One segment of society particularly disadvantaged by the introduction of IHT on pensions is unmarried couples.

Currently, pension funds can pass freely between people who aren’t married (unlike other assets) but this will change on 6^th April 2027, with IHT due on such transfers after that date.

One interesting point from the technical note is that, if an unmarried couple buy a joint-life annuity, that annuity will not be deemed to have any value for IHT purposes on first death. This means that the surviving partner can continue with the same income basis without losing any value to IHT. The same would not be true if they had used income drawdown.

There is also a wider potential application of this exemption – parents with vulnerable children. It would seem that they will be able to have a joint-life annuity with their dependant child and that arrangement should not suffer any IHT and will provide that child with an income for life.

It will be interesting to see how the annuity market reacts to these potential planning strategies.

Confirmation of double taxation?

In our previous articles, we have set out the fact that these changes create the risk of double-taxation on pension funds left on death – IHT on death and then Income Tax in the hands of beneficiaries.

There has been some debate as to whether this is the case or whether some relief will be given from Income Tax to reflect the IHT suffered.

Having examined this technical note and the associated legislation, we are confident that double taxation will apply and planning should be based on this risk. There are mechanisms to ensure people do not pay too much tax, i.e. when the estate pays the IHT liability for the pension scheme but ultimately we expect the overall rates of taxation to be 52%, 64% or 67% if death occurs after age 75 (depending on the availability and application of Nil Rate Bands, and the Income Tax status of beneficiaries).

Charities to benefit

The technical note confirms that not only will charitable legacies from pension funds be exempt from the IHT and Income Tax that will otherwise apply. They will also count towards lowering the rate of IHT applied to the estate.

Legislation already exists such that, if you leave 10% of your net estate to charity on death, your IHT rate reduces from 40% to 36%. With confirmation that any pension funds left on death will contribute to that 10% amount. Our calculations show that families where beneficiaries are likely to remain higher or additional rate taxpayers may be left better off if they leave pension funds to charity. So not only do family members benefit, but so do the causes close to the hearts of pension members. When you also factor in the much easier administration of charitable legacies on death, we can certainly foresee a significant uptick in people leaving pension funds to charity.

What to be thinking about now

With 10 months to go, the key message is to begin reviewing your position and starting conversations now.

We fully expect these changes to come into force in April 2027 but there are numerous planning options available to help counter the associated tax consequences and enable you to continue to meet your objectives.