For decades savers and advisers took it as an article of faith that pensions sat outside the crosshairs of inheritance tax. But from 6 April 2027, this assumption will no longer be true.
As a result, DC pension assets now need to be considered alongside other wealth when determining what beneficiaries might receive from this date.
HMRC’s latest technical note on this tax reform has attracted considerable attention. The guidance released in May represents a significant change in how pension wealth could be treated at death and raises big questions about how DC pensions may be used in the future. Pensions are still central to retirement saving, but their role as a vehicle for passing on wealth is potentially changing.
For advisers, trustees and employers it’s time to make preparations to ensure current processes are updated for when these changes come into force, while also ensuring savers remain onside.
Under these proposals, schemes will play a more active role in the inheritance tax process. This could include providing information to personal representatives to support IHT calculations and, in some circumstances, making payments directly from pension benefits before funds are distributed.
This adds up to more complexity, and a lot more time spent on administration, particularly where individuals hold multiple pension arrangements or have several beneficiaries.
The challenge for schemes and trustees
We must not overlook the fact that these reforms will place a significant operational burden on schemes. Data quality and information sharing will become more important and in turn more resource-intensive, with schemes needing to work more closely with advisers, executors and personal representatives.
Schemes may also need to review processes and governance arrangements to make sure they can manage additional administration requirements effectively. For smaller schemes, this could be a significant operational challenge.
Tight timelines aren’t helping either. With final guidance expected relatively close to 6 April 2027, schemes may face a compressed window to make system, process and governance changes.
Make no mistake: pensions are still a big piece of the country’s economic bedrock. Employer contributions, tax relief and automatic enrolment continue to make DC pensions the foundation of retirement saving for most individuals. But the behavioural impact of these reforms should not be overlooked. When tax policies change, individual financial behaviour often changes too. For some savers, particularly those with larger pension assets, pensions have been a key part of estate planning decisions. As these reforms near, some may reassess how pensions sit alongside Isas and other investments. Some may review whether preserving pension wealth is the right strategy, or whether different approaches to accessing retirement savings have become more attractive.
The reforms are part of wider changes to retirement planning, with advisers now spending more time helping clients think about wealth transfer, family financial objectives and balancing retirement spending with longer-term legacy planning.
For employers and trustees, this is where communication will become important. Sweeping policy changes can create uncertainty, particularly where individuals are unclear on what exactly is changing. The solution is to keep everyone in the loop with clear and straightforward updates on the legislation and what it might mean for savers.
HMRC’s latest guidance has started to fill in gaps on how this new legislation might work. But this is far from complete. Schemes and trustees still want more detail on how information moves between pension providers, executors and personal representatives, where responsibilities sit when inheritance tax liabilities arise, and how more complex cases will operate in practice. Without this, there may be inconsistent approaches emerging as the implementation date closes, creating confusion for members and beneficiaries.
The real risk to firms is not the reform itself. It’s the failure to prepare for the changes. Schemes, advisers and employers that move early to adapt their processes and reshape conversations will be well-positioned to deliver good outcomes for clients. DC pensions remain a core part of the retirement saving conversation, and always will be. What they are not anymore is a tax-efficient legacy vehicle. The industry needs to come together to deliver a clear and intentional response on how best to implement these new rules.
