In the lead-up to this year’s Autumn’s Budget, the Government narrative was heavily focused on addressing the £22 billion shortfall in public finances. The Chancellor of the Exchequer highlighted this financial gap as a key motivator for introducing further restrictions on pension tax relief, which currently costs the government an estimated £48.7 billion each year.
Here’s what the changes in the Budget will mean for your pension:
IHT on Pensions: New Rules from 2027
One of the most significant announcements in this year’s Autumn Budget concerns the new inclusion of pension death benefits in IHT calculations. Starting from 6 April 2027, pension funds passed on upon death will become part of the deceased’s estate for IHT purposes. This means that, unlike in the past, most pension death benefits will now be considered alongside other assets like property and savings when determining the estate’s value.
If the combined value of these assets exceeds the IHT threshold (the “nil-rate band,” currently £325,000, with some possible additional allowances), the surplus will be taxed at 40%. This change will apply universally across defined benefit (DB) and defined contribution (DC) pension schemes and will include most overseas pensions as well. Limited exemptions will apply to dependant’s scheme pensions and charitable lump-sum death benefits.
Moreover, this change will work alongside the existing income tax charges on death benefits. For instance, pension death benefits for those aged 75 or older will continue to face income tax charges, as will benefits exceeding the lump sum death benefit allowance for those under 75. This dual-tax setup could lead to effective tax rates on certain pension death benefits of up to 67%, shifting from a historically favourable tax regime for pensions on death to a more complex and less forgiving structure.
Implications for Trustees and Scheme Administrators
The new IHT rules introduced the budget increase responsibilities for pension scheme administrators (PSAs) and trustees. Administrators will be required to provide detailed reporting on pension death benefits to assist with estate valuation and to calculate, report, and pay any applicable IHT. Trustees will also need to account for any eligible exemptions or allowances when determining the tax due on pension benefits.
To complicate matters further, HMRC will impose interest on late IHT payments starting six months after the individual’s death. This change puts pressure on trustees to make decisions on death benefit allocations more quickly, reducing the timeline that currently allows up to two years. This tighter timeframe could be particularly challenging for trustees who are not also PSAs, increasing the burden on pension scheme administrators to fulfil these complex requirements.
Overseas Pension Transfers: Changes to the Overseas Transfer Charge
Adjustments have also been made in the budget to overseas pension transfers. Effective from 30 October 2024, transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) will no longer be exempt from the 25% Overseas Transfer Charge if the member transferring the pension remains UK-resident. Previously, this charge was waived for QROPS based in the European Economic Area (EEA) or Gibraltar.
From 6 April 2025, QROPS located in the EEA will also be subject to new regulations, including oversight by a pension regulator within the host country and compliance with UK-approved tax treaties for information exchange. This measure will affect individuals wishing to transfer pension benefits while remaining UK-resident, imposing additional oversight and regulatory requirements on overseas pension schemes within the EEA.
These regulatory adjustments reflect the government’s intent to tighten controls on pension tax relief, aligning tax benefits more closely with domestic tax obligations and reinforcing cross-border compliance in pension transfers.
We’re here to help you!
We hope this has outlined to you the new changes to pensions as per the Budget announcements. At Nordens we offer expert advice and assistance with all of your business needs: from your everyday accounting to Advisory, Tax, Audit and more.
If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us, where one of our trusted advisors would be happy talking you through your query.
