Nick Mendoza
- Partner
- Private Client
Pensions after the Budget: the details that matter when passing on wealth
For families planning how their wealth will pass on death, the April 2027 pensions changes remain firmly on the agenda. The latest Budget proposals address some practical pension concerns: protecting charitable gifts, finding the money to pay inheritance tax and avoiding an income tax charge caused by payment delays.
Pension death benefits and assets left under a Will may pass to different beneficiaries, but their tax consequences will become more closely connected from 6 April 2027 when most unused pension funds and pension death benefits (referred to in the legislation as “notional pension property”) will count towards the deceased’s estate for inheritance tax (IHT). We considered the wider change to pensions in our earlier overview. The Autumn Budget 2026 does not undo these reforms; instead, the proposed Finance Bill 2026–27 amendments tackle some practical difficulties for families and those administering estates.
Will a charitable legacy still achieve the intended tax result?
Broadly, if a Will leaves at least 10% of the net value of an estate to a registered charity, the IHT rate for that estate can be reduced from 40% to 36%. However, the calculation is more complicated than simply leaving a tenth of everything to charity and is based on a specific statutory formula (the net value of the estate after deducting debts, reliefs like business property relief or agricultural property relief, and available nil rate bands). Furthermore, for these purposes an estate is divided into three separate parts (or components):
- General component: Assets owned either in the deceased’s sole name or jointly where the deceased’s share passes in accordance with their Will.
- Survivorship component: Jointly owned assets that pass automatically to the surviving joint owner (e.g. joint bank accounts).
- Settled property component: Certain trust assets where the deceased had a right to receive the income or use the assets (for example, to live in a home held in trust).
For the reduced rate of IHT to apply, a charitable gift must meet at least 10% of the statutory ‘baseline amount’ for that particular component.
Therefore, adding notional pension property to the general component (as was envisaged) could have had unintended consequences for the charitable legacy. The proposed Finance Bill amendments will instead allow those administering an estate to choose whether notional pension property sits within that component or is considered separately for this purpose.
That choice could preserve the 36% rate for other estate assets without requiring a larger charitable gift. It would not, however, exempt the pension from IHT or give the notional pension property the reduced rate automatically.
Access to pension funds before the grant
Identifying all a deceased’s pension arrangements, obtaining valuations and establishing the beneficiaries can take time. However, the first instalment of IHT is due by the end of the sixth month after the month of death, often before obtaining a grant of representation and access to other estate assets. If the IHT is not settled in full by this payment deadline then interest will accrue on unpaid IHT. The current rate of interest on unpaid IHT is 7.75%, increasing to 8% from 24 November 2026.
From 6 April 2027 a personal representative will be able to instruct a pension scheme to pay IHT due on notional pension property directly to HMRC, subject to certain conditions and before a grant of representation is obtained. This should help ease the cash-flow pressures that can arise during the early stages of administering an estate.
When a delay should not create a tax bill
Under the current rules, some pension death benefits that would normally be paid tax-free can become subject to income tax if they are not paid within two years of the pension scheme learning of the member’s death. This means that delays in dealing with an estate or administrative delays caused by the pension scheme administrators can potentially leave pension beneficiaries with an unexpected tax bill.
For pension payments made on or after 28 October 2026, the government is abolishing this two-year deadline. Beneficiaries should therefore no longer face an income tax charge because administrative or probate delays mean that pension benefits are paid out after the second anniversary.
The other conditions for tax-free treatment would still need to be met, and the change would not remove IHT.
Excess lump sums: a different route to collecting tax
Where someone dies before age 75, certain pension lump sums can be paid tax-free up to a specified allowance. If a payment exceeds that allowance, the excess can be subject to income tax.
Under the new rules, the excess will not be treated as part of an individual beneficiary’s pension income. Instead, HMRC will calculate a separate tax charge for each beneficiary based on their share of the excess and their income tax rate for that year. While the liability will remain, this approach will avoid knock-on changes to the beneficiary’s wider income-related tax and benefits position.
What should clients consider?
These refinements underline the importance of reviewing Wills, charitable gifts and pension nominations as part of a co-ordinated review ahead of April 2027. The interaction between pensions and the wider estate will become more significant, and existing arrangements may no longer produce the intended tax or succession outcome. Taking advice in advance can help identify where changes may be needed and avoid unintended consequences for beneficiaries.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
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Tanya Lloyd
- Senior Associate
- Private Client
