Executors face a bureaucratic slog once pensions become subject to inheritance tax (IHT) on 6 April 2027. From this date, the executors or personal representatives of an estate will be liable for reporting and paying IHT owed on pensions. Unused pensions will incur 40 per cent tax on anything above the £325,000 nil-rate threshold, and any tax due must be paid within six months of the death occurring.

Under the rules, which received royal assent in March, it will fall to executors to locate all the pension pots of the person who died and contact each pension provider to get accurate valuations. They will then have to value the estate, apportion the nil-rate band and report the amount of tax attributable to each pension scheme before deciding if they want to instruct pension scheme administrators to pay the IHT due from the pension or from other parts of the estate.

Late payments will face interest of 7.75 per cent on top, so it will pay to have your affairs in order well in advance.

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Clear instructions and consolidation

Locating and valuing all of the pensions of someone who has died is bound to cause headaches for executors. It will be especially onerous where someone has died suddenly or without clear instructions and documentation.

Setting out where your pensions are and how many you have will make it easier for your executors and mean it’s less likely they’ll to run into delays.

However, even in more straightforward cases, where an executor knows about all the pensions the deceased had, it could take longer than six months for the final values of a pension fund to be calculated and reported to individuals, warns Robert Salter, a director at Blick Rothenberg.

There is also an argument for consolidating your pension pots if you have acquired several over time. “Whatever you do, don’t die with half a dozen pensions. We are suggesting that people consolidate their messy old pension pots,” says Andy King, a retirement planning specialist at Evelyn Partners. Consolidation not only makes it easier for you to manage your own pension, but representatives will find it simpler to manage your estate if they are doing it across one pension rather than six.

However, you need to consider what you will gain by transferring a pension compared to what you might lose in the process. While a pension is easier to manage if it’s all in one place, fee differences from one provider to the next could eat into its value. The investment options and reputation of the provider are also important considerations here.

Look at what’s in your pension

Another potentially problematic area is when illiquid assets, such as property, are held in a pension. If these assets need to be sold and the final value realised as part of the closing down of a Sipp it could take “considerably more than six months” to report and pay IHT, Salter says.

Those who have built up a business and own business property in their Sipp might want to reconsider their set-up. “Assets can be bought and sold in a Sipp privately; another party could buy that asset or another entity could buy that asset to give more flexibility in the pension,” says Jeff Simpson, head of wealth management at Hymans Robertson Personal Wealth. 

Alternatively, if you are holding illiquid assets in a Sipp because you planned on leaving it to your next generation you may wish to review how you hold them in light of the changes. “This could be an opportunity to reassess underlying holdings and work out whether or not these assets are well-placed in that particular structure,” Simpson adds.

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He suggests family investment companies as an alternative to holding illiquid assets in a pension, as they can give greater control over distributions and succession planning. However, these companies can be expensive and complicated to run so you should only consider them if you are passing on large sums, typically over £3mn (‘Tax reforms drive investors to family investment companies’, IC, 20 June 2025). Alternatively, trusts can work well for non‑income‑producing or growth‑focused assets where control and estate planning are key.

If you hold illiquid assets in a Sipp and IHT is owed, non-pension assets could be used to pay any tax due rather than paying it from the pension itself. James Robinson, director of financial planning at Forvis Mazars, says: “You need to think ahead and give clear instructions to the executor here as to whether they settle this part of the bill through the estate rather than from the pension.”

Reconsidering the purpose of pensions

In recent years, pensions have increasingly been used to shelter assets from IHT rather than as a tool for income. As they can no longer be used to pass on money free of IHT from April 2027, this could serve as a “trigger point” for families to again think of pensions as an income source rather than as an IHT planning tool.

This will require a shift in thinking for those who are not reliant on their pensions as a source of income. Because of their prior IHT-free status, those with large estates have typically drawn on their pensions last – instead taking income from their Isas, general investment accounts (GIAs), buy-to-lets, cash or just about anywhere else first. However, King explains: “You may be able to reduce your beneficiaries’ IHT liability by drawing down your pensions sooner.”

For this reason, it is important to look at how your pension interacts with the rest of your estate for the purpose of income between now and when the new rules kick in. This could allow you to revamp your gifting strategy.

Robinson says: “If you draw more income from your pension, you could think about using the ‘gifts out of surplus income’ rule to immediately give that extra income away so it is outside of the estate with no seven-year clock.” Gifts made out of surplus income are free from IHT even if you die within seven years of making them. They must be made in a regular pattern from income that is surplus to what you need, so they do not reduce your standard of living (Everything you need to know about IHT and gifting, IC, 1 August 2025).

If a pension holder dies after the age of 75, beneficiaries will be subject to IHT but also income tax at their personal tax rate, incurring an effective double taxation rate of 60 per cent or more, depending on their income tax status. Because of this, it is important to make any decisions about whether you should use a pension for income in plenty of time. “If people leave that decision until much later on, the next generation is going to be hit with a potential tax bill depending on the size of the pension and the wider estate,” Simpson says.

It is unwise to make rash decisions, as rules can always change, so make sure you understand your situation. “From a purely tax perspective, we would never recommend drawing down the pension too quickly, just because of the potential IHT charge,” says Salter.

While April 2027 may seem a long way off, giving thought to your planning will make it easier for your executors and beneficiaries when the day comes that they have to report and pay any IHT owed on your pension.