Most unused pension funds and death benefits will be brought into the scope of inheritance tax (IHT) from April 2027, a significant shift from current rules. The government's rationale behind this change is to prevent pension arrangements from being used primarily as intergenerational wealth transfer vehicles rather than for retirement income. This reform is estimated to affect approximately 10,500 additional estates each year.
The City of London's Pensions Committee discussed the implications of these changes during their meeting on Wednesday, 23 September 2026. Graham Newman, Pensions Manager for the Chamberlain's Department, presented a report outlining the upcoming reforms, which are expected to increase administrative complexity and potentially raise IHT liabilities for some beneficiaries. The report can be found in the Public reports pack.
While the impact is anticipated to be greater for defined contribution schemes, certain Local Government Pension Scheme (LGPS) death benefits for deferred and pensioner members may also be affected. However, death-in-service benefits, transfers to a surviving spouse or civil partner, transfers to qualifying charities, and certain dependant pension arrangements and continuing annuities are expected to remain exempt or outside the scope of IHT. Specifically, LGPS survivor pensions payable to spouses, civil partners, eligible cohabiting partners, and dependent children, which provide ongoing income rather than a lump sum, are not expected to be directly affected by the reforms.
Under the new rules, personal representatives will be responsible for identifying pension death benefits, reporting them to HMRC, and ensuring any IHT is paid. To simplify this process, HMRC is introducing a new Pensions Direct Payment Scheme. This scheme will allow pension administrators to pay IHT directly to HMRC from the relevant death benefits before any remaining balance is paid to beneficiaries. This is intended to reduce administrative burdens on personal representatives, avoid beneficiaries having to repay funds after distribution, and mitigate the risk of unpaid IHT due to assets already being distributed.
The LGPS administration is expected to face increased complexity, including more member and beneficiary enquiries, additional liaison with executors, solicitors, and HMRC, and potential delays in death grant payments pending confirmation of IHT liabilities. While these changes are not expected to create a direct financial cost for the Pension Fund, they represent a significant operational change. The Pensions Office plans to publish information on the changes on the Pension Fund website and issue targeted member communications to address these upcoming changes.
The practical effect of the IHT changes on individual estates will depend on the value of the death grant, the member's other assets, any available spouse or charity exemptions, and the availability of nil-rate bands and residence nil-rate bands. It is noted that the majority of estates will continue to pay no inheritance tax.