UNUSED PENSION FUNDS AND DEATH BENEFITS: NEW INHERITANCE-TAX RISKS FROM 2027
December 2, 2025
Unused Pension Funds and Death Benefits Face IHT from April 2027
Introduction
One of the biggest reforms to emerge from the 2025 Budget affects pensions: from April 2027, unused pension funds and most death benefits will be treated as part of a deceased person’s estate. This move will potentially expose them to Inheritance Tax (IHT). What was once a widely used estate-planning device may no longer be safe. This change has major implications for individuals, families and advisers - especially those with substantial pension pots, defined contribution schemes, or clients relying on pensions as a legacy vehicle.
What’s changing (with effect from 6 April 2027)
From the 2027–28 tax year onward:
- Most unused pension funds and pension death benefits (from defined contribution and similar schemes) will be included in the deceased’s estate for IHT purposes, regardless of whether the pension scheme is discretionary or non-discretionary.)
- The previous treatment, under which many pension schemes (especially those using trust-based or discretionary death-benefit mechanisms) fell outside the IHT estate, will be largely eliminated.
- As a result, where the total value of the estate (including pension funds) exceeds the IHT nil-rate band (currently £325,000 per individual - plus any additional allowances) the excess may be taxed at up to 40%.
- The existing exemptions for death-in-service benefits (from registered pension schemes) will remain. Those payments will not count toward the estate for IHT purposes.
- To assist estates dealing with potentially large tax bills and liquidity pressures, the new rules will allow personal representatives (executors/administrators) to instruct pension-scheme administrators to withhold 50% of taxable pension/death-benefit payments for up to 15 months. That withheld amount can be used to pay IHT before the balance is released to beneficiaries.
In short: pensions will no longer enjoy a special “outside-IHT” status and will, in most cases, be treated like any other asset in the estate.
Who is likely to be affected
This change impacts a wide range of individuals, but will be especially relevant for:
- Holders of sizeable defined contribution pension pots (private or workplace pensions) who die with unspent funds.
- Clients who have previously relied on pension funds to pass on wealth outside the IHT net. For example, to children or other beneficiaries. Under the new rules, such strategies may no longer work.
- Estates with a mix of assets (property, pensions, investments) which, when pensions are added, may push the total value above the IHT threshold, thereby crystallising a potential 40% tax charge.
- Personal representatives (executors/administrators) and pension-scheme administrators: both will face additional reporting, administration and potentially tax-payment duties on death.
Although not all estates will end up paying IHT after the change, industry projections suggest a material increase in the number of estates that are IHT-liable because of pension inclusion. The combination of IHT (on death) and potential income tax (on withdrawal by beneficiaries) means the effective tax rate on inherited pension funds may be “very substantial”. In some cases leading to what commentators call a “tax trap.” It will also add potential strain to executors and personal representatives, who may struggle to find liquidity to meet IHT bills unless pension-scheme administrators correctly withhold funds and unless beneficiaries understand that distributions may be delayed.
Practical Planning - What You Should Do
Given the potential impact, now is a good moment to reassess pension and estate planning. Some practical steps to consider:
- Review pension holdings and beneficiaries now. For anyone with significant pension savings, it may make sense to run projected valuations including pension pots, to see whether the total estate will exceed IHT thresholds after April 2027.
- Consider early drawdown or use of pension funds in retirement. If funds are drawn and spent (or transferred in a taxable way) before death, they should fall outside the IHT net. For some clients, especially those in good health, more aggressive drawdown in retirement may make sense as a tax-minimisation strategy.
- Revisit wills, inheritance and legacy plans. If pensions were part of a legacy plan for children or non-spouse beneficiaries, those plans may need rethinking, especially if the estate now includes pension assets, pushing the value above the nil-rate band.
- Plan for liquidity at death. Estates that include substantial pension funds may need cash or other liquid assets to meet IHT bills. Relying on pension distributions alone may delay inheritance. The new “withholding + payment first” mechanism helps, but families and executors should anticipate possible delays.
- Engage with pension-scheme administrators early. Ensure pension trustees are informed of the changes and know their new duties (and your instructions). For example, to withhold 50% if IHT is likely. Miscommunication or delay could lead to unintended tax liabilities or distribution hold-ups.
- Integrate with broader IHT planning. Take a holistic look (pensions are only one part of the estate). Review property, investments, trusts, gifts, and other assets under the new rules to reassess total exposure and planning opportunities.
Conclusion
Bringing unused pension funds and death benefits within the IHT net from April 2027 represents among the most significant changes to inheritance tax planning in decades. Pensions, long seen as a tax-efficient way to pass wealth on, will no longer enjoy a special status, and many estates may find themselves unexpectedly subject to IHT. For individuals, families, and advisers, this means it is time to act. Review pension provisions, revisit legacy plans, and ensure estates are structured in a way that minimises tax leakage while preserving flexibility and liquidity for beneficiaries.
As always, if you’d like to discuss how this affects you or your clients, or to walk through scenarios under the new regime, please get in touch via our contact page at Mosaic Chambers.
Introduction More wealthy UK residents are exploring life overseas ahead of the 2026/27 tax year. Higher UK taxes, political uncertainty and a desire for a different way of living are all pushing people to look at alternatives. Four destinations stand out for high-net-worth UK individuals as at late 2025: 1. United Arab Emirates (Dubai) 2. Portugal 3. Switzerland 4. Malta Each offers a different blend of tax advantages, residency options and lifestyle. United Arab Emirates (Dubai) - Dubai is now the default choice for many UK entrepreneurs and professionals. Tax For individuals, there is currently no personal income tax on salaries, bonuses or most investment income, and no local capital gains or inheritance tax regime for individuals. There is VAT and a developing corporate tax regime, but personal tax remains far lighter than in the UK. The UK–UAE double tax treaty helps reduce the risk of the same income being taxed twice and needs to be considered alongside UK residence rules. Residency Common routes for UK nationals include: Employer- or company-sponsored residence visas Remote-worker visas for those employed or self-employed abroad Long-term “golden” style visas linked to investment, property or professional status Retirement options for over-55s. (All require private health insurance and periodic renewal.) Lifestyle Dubai offers a high standard of living, excellent connectivity and a large, well-established British community. Housing and schooling are expensive and the lifestyle can encourage overspending, but for many the tax position and opportunity outweigh the costs. Best for: Maximising net income and building or scaling a business in a dynamic, international city. Portugal - Portugal appeals to those who want EU residency, a milder climate and a slower pace of life. Tax The old NHR regime has closed to new applicants and been replaced by a newer incentive framework (often referred to as IFICI) aimed at certain professionals and activities. The UK–Portugal tax treaty reduces double taxation, and Portugal does not operate a classic wealth tax, though property-related charges can apply. (It's signed and ratified but not yet fully in force as of early 2026, which may slightly affect immediate tax planning). Residency Post-Brexit, common routes for UK nationals include: D7 visa – for those with sufficient passive income (pensions, investments, rentals). D8 / Digital Nomad visa – for remote workers with qualifying income from abroad. Work and other residence visas tied to employment or specific skills. These can lead to long-term residence and, ultimately, citizenship if physical presence and integration tests are met. Lifestyle Cost of living is generally below the UK (though higher in central Lisbon and the Algarve), English is widely spoken in cities, and the public and private healthcare systems are well regarded. There are large British and wider international communities. Best for: Those wanting EU residence, good quality of life and a balance of tax and lifestyle advantages. Switzerland - Switzerland attracts UK families who prioritise security, discretion and top-tier services. Tax Tax is set at federal, cantonal and communal level, so overall rates vary widely by canton. Well-chosen cantons can be very competitive for both individuals and companies. Private capital gains are not generally taxed, but there is an annual wealth tax on net assets, with rules depending on location. For suitable non-working individuals, some cantons still offer lump-sum (forfait) taxation, where tax is based on living costs rather than worldwide income, subject to minimum levels and conditions. Residency As non-EU nationals, UK citizens use: B permits – time-limited residence, often linked to work L permits – short-term residence for specific assignments C permits – longer-term settlement after sustained residence and integration Wealthy retirees and non-working individuals may be able to obtain residence based on financial self-sufficiency and, in some cantons, lump-sum taxation. Lifestyle High costs are offset by excellent infrastructure, schools and healthcare (with compulsory private health insurance). International communities are strong in Zurich, Geneva and other cities, though social life can feel more formal than Southern Europe. Best for: Those seeking stability, discretion and first-class public services and education, rather than the lowest day-to-day costs. Malta - Malta is a compact EU state with a very familiar feel for UK nationals: English is an official language and the legal and business environment is comfortable for British professionals. Tax Malta’s tax system and UK–Malta treaty can be particularly attractive where you hold significant foreign-source income. Under the Global Residence Programme, qualifying individuals can pay a favourable flat rate on foreign income remitted to Malta, while foreign capital gains kept offshore are generally not taxed in Malta. There is no separate wealth tax and no classic inheritance tax, though duties may apply to certain Maltese assets. The separate “golden passport” (citizenship by investment) route has been struck down by the EU’s top court, but residence programmes remain available. Residency Options for UK citizens include: Employer-sponsored Single Permits combining work and residence The Global Residence Programme for financially self-sufficient individuals meeting property and minimum tax thresholds Digital-nomad-style visas for remote workers Long-term residence after several years of compliant stay Lifestyle Costs (especially rent and property) are typically lower than in the UK outside the most fashionable areas. English is widely used in government and business, healthcare is solid, and London is only a short flight away. Best for: Those wanting an English-speaking EU base with favourable treatment of foreign-source income and a tight-knit expat community. How to decide & next steps - All four countries can work extremely well for UK high-net-worth individuals, but for different profiles: Choose Dubai if your priority is low personal tax on active income and you are comfortable with a high-energy city. Choose Portugal if EU residency, climate and lifestyle matter as much as tax. Choose Switzerland if stability, education and healthcare are at the top of your list. Choose Malta if you want an English-speaking EU base with flexible options for foreign income. The right answer depends on your overall wealth, income mix, family plans and how tied you remain to the UK. If you would like bespoke, confidential advice on whether remaining UK-resident or relocating to Dubai, Portugal, Switzerland or Malta is the better strategy for your situation, you are welcome to get in touch to explore your options in detail.
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