Will my occupational pension death benefits be taxed when I die?

The current regime

Under the existing framework, death benefits paid from registered pension schemes do not usually fall within the deceased member’s estate for inheritance tax purposes. That includes dependants’ scheme pensions; unused drawdown funds; and lump sum death benefits (where the trustees have discretion as to whom they are to be paid)

Notably, non-discretionary death in service benefits do form part of the member's estate for IHT purposes – but not for much longer.

Upcoming changes

Following the consultation, the government has committed to press ahead with its proposals, save for a few key changes. Once the new rules come into force in April 2027:

• Death benefits payable from registered pension schemes will form part of a deceased estate except for:
  • Dependants’ scheme pensions (pensions paid to a dependant, eg the member’s spouse or child)
  • Death in service benefits, even if they are discretionary
• Where IHT is payable on unused pension funds and death benefits, the onus will be on the personal representatives to report and pay it. This is consistent with the current position for the reporting and payment of IHT (the original proposal was to make pension scheme administrators responsible)

However, it’s unclear at present whether a charity lump sum death benefit – paid to a the charity in the absence of any dependants of the deceased – will be out of scope of the new rules.

Draft legislation has now been published and a second consultation is ongoing (closing mid- September).

Will it affect me?

Not necessarily. If you have a registered occupational pension scheme that would form part of your estate for IHT purposes when the rules are implemented, IHT might only be payable if the total net value of your estate was to exceed the nil rate band (currently £325,000).