IHT on pensions: 6 questions advisers need to ask

This article is intended for financial services professionals only. None of the information contained in this article should be received as advice. Pensions are a complicated area of financial planning and IPM suggests that financial advice from a suitably regulated financial adviser is sought before an individual takes any action in respect of their pension savings.

Over the past couple of years, in our SIPP bubble, it feels like we haven’t stopped talking about unused pensions being brought into the scope of Inheritance Tax (IHT) from April 2027 and the impact this will have on clients’ SIPPs.

This is also reflected in the number of clients we are seeing drawing benefits from their SIPPs. We saw an increase of almost 9% in individuals drawing either a pension commencement lump sum or income under flexi-access drawdown in the four weeks leading up to the end of the 2025/26 tax year, compared to the same period in 2024/25.

Despite this increase, the number of clients making contributions to our SIPPs, as well as the number of new enquiries we are receiving that include making payments into pension schemes, remains unaffected.

Therefore, it was surprising to us to recently read this FTAdviser report from March 2026. It quoted research from Standard Life stating that almost 9 out of 10 people were not aware of the upcoming changes.

This is despite chancellor Rachel Reeves announcing in the 2024 Budget that the IHT threshold will be frozen at £325,000 until 2030/31. While there are exemptions to these allowances, the resulting fiscal drag from this decision is expected to bring many more estates into the realm of IHT. When you add unused pensions into a client’s estate, it is likely that this number will increase further.

Even though we are under a year from this rule change coming into effect, HMRC are still releasing information on the processes that personal representatives and pension scheme administrators will have to follow, including this recent technical note.

You may have recently caught an FTAdviser piece, featuring James, about the upcoming rule changes being an opportunity for advisers to add significant value to their clients, reviewing their long-term strategies to ensure that their affairs are left in the way their clients intend.

With this is in mind, here are our six IHT and pension-related questions we think advisers should be asking for clients ahead of April 2027.

1. Where are all of the client’s pension benefits?

Upon the death of an individual, the personal representative must collate all of the information to value the deceased’s estate. This will include any unused pension benefits.

Often, the pension representative will be a relative of the deceased. At what will already be an emotional time, the personal representative must now not only value the estate as has always been the case, but they will also need to value the deceased pension benefits. This will need to be done within six months of death.

Knowing where an individual’s pension benefits are held and, probably most importantly, knowing that they are in a place where valuations are easily obtainable will be one area that advisers could consider in advance. While new guidance may force pension scheme administrators to act within a certain time frame, waiting months for a pension valuation will add to the emotional toll and pressure on the personal representative.

It is hoped that the upcoming pension dashboard will be able to assist with this – especially as there is approximately £31.1 billion sitting in lost or unclaimed pensions, Pensions UK reports.

2. Will the estate fall into the scope of IHT?

IPM typically deals with high net worth individuals who not only have large pension savings, but also typically have wealth accumulated outside of the pension that will see their estate subject to IHT on their death.

However, HMRC suggests that bringing unused pensions into the scope of IHT will “only” impact a further 10,500 estates in 2027/28.

It is worth remembering that there are a range of thresholds for IHT that apply and could minimise the impact of any tax due in the event of your client’s death:

The standard IHT threshold is £325,000 per individual.
In the event of death, any assets left to a spouse or civil partner are exempt regardless of the value of the deceased’s estate.
The surviving spouse is allowed to use both IHT allowances in their calculations, assuming the first spouse did not use up their full allowances.
This in effect gives the surviving spouse an IHT exemption of up to £650,000.
There is more. The “residence nil rate band” is an additional allowance on top of the standard £325,000 allowance for anyone who leaves their home to a direct descendant. This is worth a further £175,000.
This can be passed on to the surviving spouse, as is the case with the standard threshold, meaning in some cases the total exemption on a surviving spouse’s estate could reach £1 million.
For estates worth £2 million or more, the residence nil-rate band is tapered by £1 for every £2 over £2 million, meaning it disappears completely at £2.35 million or £2.7 million for a surviving spouse claiming an unused residence nil-rate band.

3. Who will the client’s personal representatives be?

The job of valuing the estate and paying any IHT that is due will be the responsibility of the personal representative.

If you are making plans for your client as to how any IHT will be paid from the estate in the event of their death, it is important that the personal representative is on board with this because, as we will see below, there are options on how and where the IHT can be paid.

Make a point of knowing who your client’s personal representative will be. Make sure the personal representative knows about your relationship with the client and that you are on hand to assist in the event of the client’s death.

4. How will any IHT due be paid?

If any estate that includes any unused pension is subject to IHT, there are several options available as to how this can be settled.

IHT may be settled from funds from the free estate, i.e., outside of the pension. Personal representatives can pay any IHT due on the whole estate, including any pension benefits, directly from these funds before applying for probate.
The personal representative may issue a payment notice to a registered pension scheme administrator, specifying the amount of pension IHT due. This amount cannot exceed the total IHT charge owed on the scheme’s “notional pension property”.
The pension beneficiaries can take their full entitlement to benefits and liaise with HMRC to pay any IHT due directly. This process can also include any refund due on income tax paid on the amount of IHT charge on their benefits.

5. If the pension is to pay any IHT, will this be possible?

A lot of commentary around the SIPP space and IHT has been on the SIPP’s ability to pay its share of the IHT liability, if required. This focus has mainly been around assets that are deemed “illiquid” – such as commercial property.

As you are probably aware, IPM are experts in holding commercial property in SIPPs. We see a wide variety of transactions put to us and, like many things in the bespoke SIPP space, there is not going to be one solution that suits all.

Some SIPPs will have assets that are deemed trickier to sell in a shorter timeframe, and this needs to form part of an adviser’s thought process when considering what the options are in the event of a client’s death.

While this is an important consideration, we see there being multiple potential scenarios where a client’s SIPP holds an asset such as property in the event of death:

If the nominated beneficiary is the surviving spouse or civil partner, no IHT will be due.
Consideration should be given as to whether the total estate will be liable to IHT, given the exemptions noted in point two, above.
If IHT is due, this could be settled from funds from the free estate, i.e., there would not be a call to liquidity on the pension to settle an IHT liability. This is the approach we see advisers being able to add the most value, building a long-term strategy for clients to deal with any potential IHT in the event of the client’s death.
While in some instances the property is a significant portion of the pension scheme, this is not always the case. There are lots of SIPPs we look after where the value of the property is a lesser proportion of the SIPP, with the remainder being invested in liquid assets via a platform, a discretionary fund manager, or being held in a cash management solution.
If the client is part of a group SIPP that holds a property, it may be possible for the deceased client’s SIPP to “sell” a portion of the property to other members within the group SIPP, thus creating liquidity.

6. Don’t forget the normal rules around pensions when death occurs will apply

Given the significance of the changes coming up in 2027, it’s easy to forget that the usual pension rules will apply in the event of a client’s death.

For instance, where the deceased was aged over 75 at the time of death, any resulting death benefits will be subject to Income Tax at the beneficiary’s marginal rate.

However, to avoid the double taxation of the benefits, there are draft regulations so that Income Tax will not be payable on any portion of relevant death benefits equivalent to the IHT due on that pension.

Consideration will also need to be given to the lump sum death benefit allowance.

Get in touch

To discover how our team can help you manage SIPPs on behalf of clients and remain abreast of the upcoming changes, get in touch.

Email info@ipm-pensions.co.uk or call 01438 747151.