Inheritance Tax on unused pension funds and death benefits. An update on government Policy Paper – July 2025
22 July 2025With Parliament starting its summer recess on 22 July 2025, we have been waiting for a Policy Paper to be issued by the government on the topic of the application of inheritance tax to some unused pension funds starting on 06 April 2027. This follows the announcement by the Chancellor, Rachel Reeves MP at her last Budget in October 2024, and the subsequent consultation with the pension profession.
A Policy Paper was issued on 21 July, just before the recess and the full details can be found here: Inheritance Tax on unused pension funds and death benefits - GOV.UK
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The highlights from the paper and its future effect on unused pensions from 06 April 2027 are detailed below:
- Transfers to spouses / civil partners will be exempt.
- Transfers to charities will be exempt.
- Payments from registered Death in Service and Dependants Pension schemes from defined contribution and defined benefits pensions will be excluded.
- Pensions inherited outside the exempted / excluded detailed above where the estate is subject to inheritance tax will usually be charged at the standard rate of 40%.
- It will be the personal representatives of the estate to report and pay inheritance tax and HMRC will provide guidance and a calculator to help with working out the liability and how to pay it.
As you can see, there is much to consider looking forward.
Age over 75 / Income tax on the recipient
As an additional note outside the policy paper, please note that inherited pension funds from a member who was over the age of 75 are also subject to income tax at their highest marginal rate of the recipient
Planned Budget October 2025
For reference, we have another Budget due in October 2025, and it will be interesting to see if other personal finance changes are announced. It is noteworthy that higher government borrowing was announced at the time of writing this blog, and the costs of this may place extra pressure to raise more tax in the future.
Summary
I am pleased that this Policy Paper has provided the clarity sought by many as we move forward to the way pensions may be taxed in the future. If you would like to consider your overall pension planning a stage further, then please contact the team at Chapters Financial in Guildford.
No individual advice is provided during the course of this Blog.
Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner
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