Pensions and Inheritance Tax: navigating a complex new landscape

Essentially, these make a person’s pension savings part of their estate for IHT purposes. The usual IHT exemptions will then apply to the pension savings, like the spouse’s or civil partner’s exemption. 

However, in many cases, this change of policy will result in IHT being payable on the individual’s pension savings which the deceased’s personal representatives will then have to manage. Because this is completely new, Government has had to construct a complicated system for the pension schemes to communicate with the personal representatives and beneficiaries to ensure any IHT  on the deceased’s pension savings is accounted for and paid to HMRC. 

The Baroness explained why she thought the proposed arrangements were unworkable. 

All of this would have to be done, in many cases by lay personal representatives, with themselves having little to no understanding of the very complicated world of pensions and with HMRC being able to impose fines and penalties if any IHT payment is made late. Due to the nature of the IHT system, such payments are required to be made to HMRC no later than six months after the end of the month of the person's death, often before the personal representatives are even formally in office. This creates problems for pension schemes in terms of who they accept as the deceased’s personal representatives. Also, many individuals are not fully aware of where all their pension savings are in their lifetime. If they aren’t all identified by the individual before their death, then their personal representatives will have a mammoth task in trying to establish what their pension savings were and work out if IHT may be payable. 

The Baroness called upon the Government to scrap its current proposals. 

Penny Cogher, pensions partner at Irwin Mitchell LLP, who provides legal advice on all types of pension schemes to individuals and their IFAs, described some of the problems pension schemes would have with the new processes. 

Pension schemes are not set up to make decisions quickly about who should receive the pension benefits payable on the death of a scheme member. To help the new system run more smoothly, personal representatives can direct a pension scheme to withhold 50% of the deceased’s pension for 15 months, however this then causes all sorts of problems for the pension scheme. When do they disinvest the pension funds? How do they manage the investment risk? 

Also, pension schemes will have to develop systems for ensuring they are communicating with the right personal representatives for the deceased. The Baroness agreed with Claire-Marie Cornford, Head of Private Client Dispute Resolution at Irwin Mitchell LLP, that problems over who the pension schemes decide are the deceased’s personal representatives could lead to costly family disputes. She already sees regular family disputes over who should be the deceased’s personal representative and the pension dimension will only increase this.

Naomi Neville, private client partner, explained how difficult the new regime would be for personal representatives and estate planners, with the fundamental problem being that personal representatives are liable for IHT on pensions they don’t control or even know about. 

She noted there have been some concessions to try to make the system more workable. Personal representatives can direct pension schemes to withhold 50% of pensions for 15 months so this gives them confidence the IHT will be paid, and the pension schemes themselves can pay the IHT direct to HMRC. Also, there is some protection for personal representatives if a pension is discovered, after they’ve finished the estate and got clearance from HMRC, and this does seem to be a developing area. However, overall the risk still remains with the personal representatives. The Baroness echoed this and asked who would want to be one. Naomi explained what steps individuals and IFAs could take now to help manage some of those risks. 

In the meantime, at least in part in anticipation of these changes, pension savers continue to access their pension savings apace, with the latest HMRC statistics published on Thursday 30 July 2026 showing individuals withdrew £22.4bn in taxable flexible pension payments during 2025/26, compared to £18.6bn in 2024/25. Between January and March 2026, £5.9bn was withdrawn by 770,000 people. While public confidence in pensions may not be flagging, public confidence in the fairness of the UK IHT system is going to be put to the test with the IHT pension changes. 

This was a lively session, with conversation continuing over a delicious lunch at Irwin Mitchell’s offices. Sadly John Bunker, (solicitor and chartered tax adviser), who leads the Chartered Institute of Taxation’s (CIOT) working group on these reforms and who gave evidence in October 2025 to the House of Lords Finance Bill committee for CIOT, was unable to attend as he was recovering from surgery. However, he continues to be heavily involved in discussions and consultations about their practical implementation and HMRC’s guidance. 

As usual, if you do have any questions about this topic, please do get in touch with our experts:

Penny Cogher

Naomi Neville

Claire -Marie Cornford

John Bunker