Pension schemes, providers and administrators need to act now to prepare for changes to the inheritance tax treatment of pensions, with less than six months to go before the rule change comes into force.
Law firm Sackers conducted a poll of industry professionals during a recent webinar on the new regime, and found that more than two-thirds of the 120 respondents felt very ready or fairly confident about their readiness for the changes.
However, attendees highlighted continuing uncertainty around the details of the new regime, with time pressure on making death benefit decisions and payments identified as the leading concern.
This comes as most unused pension funds and death benefits will be brought within the scope of inheritance tax from 6 April 2027. The changes create new responsibilities and potentially significant administrative challenges for pension schemes.
Eleanor Daplyn, partner at Sackers, said: “While our polling suggests many trustees are relatively confident about their preparations, the volume and detail of questions we received shows there is still a lot to work through. The new regime will affect not only the tax treatment of certain pension benefits, but also how schemes administer deaths, interact with personal representatives and beneficiaries, and meet new deadlines.
“With 6 April 2027 approaching, trustees should be speaking to their administrators now and reviewing their processes, scheme documentation, and member communications. While further guidance is still to come, there is plenty that schemes can and should be doing in the meantime.”
Communication clarity crucial
Consultancy group LCP has also urged schemes to review their communications and tackle potential confusion about death benefits ahead of April’s changes.
It warned that trustees and pension managers would need to help members understand which benefits are affected, how to record their wishes, and what their loved ones may need to do after their death.
One potential source of confusion LCP highlighted is that members may need to complete separate expression of wish forms for their defined contribution (DC) pension pot and an insured death-in-service lump sum. Although both benefits are linked to the same employment, they may be managed by different organisations, with separate nomination processes.
The benefits may also receive different tax treatment. While the DC pension pot will generally fall within the member’s estate for inheritance tax purposes, an insured multiple-of-salary death-in-service benefit will normally be excluded.
“Schemes should use the time before April 2027 to identify where those differences could cause confusion and make sure members and their families know what to expect.”
Beneficiary nominations are also set to become a more prominent measure of member engagement under the proposed Value for Money framework.
LCP believes this creates an opportunity to look beyond whether communications have been issued and assess whether they help members take practical action.
Alasdair Mayes, partner at LCP, said: “The starting point is understanding which benefits are affected, rather than assuming all death benefits will be treated in the same way. A member’s DC pension pot and insured death-in-service benefit may sit alongside each other but have different nomination processes and different inheritance tax treatment.
“Schemes should use the time before April 2027 to identify where those differences could cause confusion and make sure members and their families know what to expect.”
The warnings come as research by Mattioli Woods shows that 64% of UK adults are unaware of forthcoming inheritance tax changes affecting some pension funds from April 2027.
The lack of awareness is reflected in wider uncertainty around inheritance planning, the wealth management firm said, with just 18% of those surveyed feeling confident they will be able to pass on money or assets to their children or family in the most tax-efficient way. Awareness of the changes is particularly low among those aged 50 to 64, with 59% unaware of the forthcoming legislation.
