The government’s plans to radically change how inherited pensions are taxed is poised to receive Royal Assent and become law, despite opposition from industry groups and some public dissent.
The Finance (No. 2) Bill has made its way through the Commons and the Lords and is now in its final stages.
Under the Bill, unused pension funds will be subject to inheritance tax (IHT) at up to 40% similar to other assets for the first time from April 2027.
Quilter retirement specialist Adam Cole said: "The Royal Assent of the Finance Bill confirms beyond doubt that inheritance tax on pensions is happening. This represents one of the most significant changes to pension taxation in a decade and fundamentally alters long‑standing estate planning strategies."
Cole said the rule change "risks creating significant complexity and administrative burden for grieving families, who could face lengthy delays as personal representatives gather valuations, submit forms and settle IHT on pension assets alongside the rest of the estate".
"These proposals mean the process at death is likely to become more complex, with delays also anticipated in payments to non-exempt beneficiaries," he said.
Several amendments were made to the Bill to help tidy up the process of making pensions subject to IHT, however.
A key change up was to let both current and prospective personal representatives (PRs) – those appointed to sort out any IHT due on pensions – pause the distribution of inherited pensions, retaining up to 50% for up to 15 months to cover potential IHT liabilities.
AJ Bell head of public policy Rachel Vahey said: "Without this legislative tweak, those who are looking to take on the role of PR may find that by the time the battle with paperwork is won and the official appointment comes through there is no money left in the pension to settle the IHT bill after it has been paid out to family or friends."
Stopping the full pension payment makes sense if you are the one landed with paying the IHT, but it clearly creates the possibility of family feuds, Vahey added.
"Up to half the inherited pension may be held back from someone for over a year and they may get less than they expected after the tax has been paid. It's easy to see this could become a bone of contention between squabbling siblings or stepfamilies, or other friends and family expecting to inherit some or all of the pension," she said.
Another significant amendment was to change the rule that death-in-service benefits are only exempt for an active member, to extend this to non-active members, widening it out.
Quilter's Cole said with the Finance Bill about to pass into law and the direction of travel now firmly set, advisers must start reconsidering estate planning strategies, many of which will be fundamentally reshaped by the inclusion of pensions within the taxable estate.
Most notably, options for mitigating IHT via pension preservation are narrowing, and advisers will need to revisit long‑held assumptions about the order in which clients draw down their assets.
"However, there are not many advice touchpoints with clients between now and April 2027, meaning advisers have a relatively short runway to support clients through what will be a major transition in tax treatment," Cole said.
"Given the challenges ahead, it is vital that advisers play a proactive role in supporting families, helping them navigate the heightened administrative burden, anticipate possible delays in accessing funds and ensure estate plans are re-aligned well ahead of implementation," he added.
This article was originally published by Professional Pensions' sister title, Professional Adviser
