Estate Planning for Pension Death Benefits and Life Policies

The position depends partly on when the death occurs.

Under the current rules applying before 6 April 2027, many discretionary pension death benefits can fall outside the member’s estate for Inheritance Tax purposes.

However, Finance Act 2026 introduced significant changes for deaths occurring on or after 6 April 2027. From that date, most unused pension funds and pension death benefits will be brought within the value of the deceased person’s estate for Inheritance Tax purposes.

There are important exceptions and exemptions. For example, qualifying death-in-service benefits are excluded from the new regime, while Inheritance Tax exemptions can apply to benefits passing to certain beneficiaries, including spouses and civil partners in qualifying circumstances.

The change makes it important to consider pension benefits as part of wider estate planning rather than assuming they will always sit outside the estate.

Not necessarily.

Many pension schemes operate on a discretionary basis. The pension trustees or scheme manager decide who will receive the benefits after considering the scheme rules, potential beneficiaries and any expression of wish you have provided. They will generally take your nomination into account but are not necessarily legally required to follow it.

Your pension nomination should therefore be reviewed separately from your Will and kept up to date when your family circumstances change.

A trust can be appropriate in some circumstances, but it is not automatically the right arrangement for every policy or every family.

Where a person is both the life assured and policyholder, the proceeds of a life policy will ordinarily form part of their estate on death. Holding a policy through an appropriate trust can change who owns and receives the policy benefits and may therefore have estate-planning and Inheritance Tax consequences.

The tax treatment of trusts can itself be complex, so the existing policy, beneficiaries, premiums and wider estate should be considered before making changes.

We can advise on the legal structure and work with your financial adviser where advice about the suitability or type of insurance product is also required.

For deaths occurring on or after 6 April 2027, most unused pension funds and pension death benefits will be treated as part of the deceased’s estate for Inheritance Tax purposes. The legislation giving effect to these reforms received Royal Assent in March 2026.

Personal representatives will have responsibility for accounting for any Inheritance Tax arising and will need information from relevant pension schemes when establishing the value of the estate.

The reforms do not mean every pension death benefit will be taxed. Qualifying death-in-service benefits are specifically excluded and exemptions remain available where benefits pass to certain exempt beneficiaries.

Anyone with substantial pension wealth should consider reviewing their wider estate plan before the new regime takes effect.

There is no single timetable that will suit everyone, but it is sensible to review these arrangements periodically and after significant changes in your circumstances.

Events such as marriage, divorce, the birth of children, the death of a beneficiary, retirement or major changes in your finances may mean an existing nomination or trust no longer reflects what you want to achieve.

A review should consider pension nominations and life policies alongside your Will and any existing trusts so that each element of the estate plan continues to support the same objectives.