IHT on pensions… time to consolidate?

How can clients ease the process?

For some clients, the most valuable planning step may simply be improving organisation. Before April 2027, clients may want to review whether their affairs are easy for others to understand and administer.

There are a number of things that clients can do to help their LPRs deal with their estate:

• make a will, keep it up-to-date, and stored in a known safe place
• keep a list of all pension arrangements, detailing the provider contact details and policy number (stored with the will)
• review each pension plan, consider reducing the number held by consolidating arrangements
• ensure that death benefit nominations are kept up-to-date

These steps may not reduce the tax bill on their own, but they can reduce the risk of delay, confusion and avoidable administration at death.
 

What LPRs may need to do

From 6 April 2027, LPRs will be liable for reporting and the payment of IHT due on unused pension funds and death benefits, and pension beneficiaries will become jointly and severally liable for any IHT due on those benefits to which they are entitled, from the point at which they are appointed. Tasks and options available to LPRs include:

• notify PSAs of the scheme member’s death, requesting the value of any unused pension funds or death benefits. In response to their consultation, the Government stated that PSAs must provide this within 4 weeks of receiving notification
   
• issue a withholding notice to the PSAs in order to secure funds to meet any IHT liability arising on those death benefits
   
• carry out IHT calculations, assessing any available nil rate band (NRB) and residence nil rate band (RNRB), and apportioning them if required
   
• decide whether to settle any IHT liability due on notional pension property from other assets within the estate, or issue a payment notice requiring the PSA to pay the IHT liability (where it exceeds £1,000) in respect of their benefits – payment must be made within 35 days

This is where the number of arrangements can matter. If the estate contains several pension plans, each with separate providers, separate valuations and potentially different benefit structures, the process becomes more complex.

 

Where consolidation may help

Clients should review their existing pension arrangements taking account of the type of scheme and whether they are currently receiving contributions or whether they are paid-up or providing deferred benefits. Active workplace pension schemes should normally be retained since they will be receiving an employer contribution which otherwise could be lost.

Defined Contribution (DC) Pensions

Transfers from DC to DC in the accumulation phase are relatively straightforward with most transactions being requested online through the receiving provider (who will then deal directly with the ceding company). The key considerations when choosing a consolidator plan:

• Price – which provider offers a suitable plan with a competitive charging structure
• Investment choice – does the plan offer access to an appropriate range of funds
• Flexibility – is a full range of flexible retirement options available within the plan (although a further switch ‘at retirement’ could be undertaken if deemed appropriate)
• Service – does the provider deliver a high level of customer service

Care should be taken to check whether any key benefits apply to the existing policy which could be lost on transfer, such as a higher protected tax-free cash entitlement, a guaranteed annuity rate, a terminal bonus (on with-profits investments), or whether penalties might apply on transfer such as an early exit charge or a market value reduction (again, on with-profits investments).
 

Drawdown arrangements

For clients already in drawdown there may be good reasons to explore a transfer – such as better fees and charges, or more appropriate investment options – however consolidation wasn’t seen as one of them. This is because, to be a recognised transfer and avoid unauthorised payment penalties, strict HMRC rules must be met, which preclude consolidation with other arrangements.

HMRC’s recognised transfer rules require the whole of the relevant drawdown fund to be transferred, and the receiving arrangement must be a new arrangement that contains no other sums or assets. If those conditions are not met, the transfer will not be a recognised transfer. In practice, that means a drawdown transfer does not reduce the number of arrangements held. Drawdown plans cannot simply be merged into an existing arrangement holding other assets - but each drawdown transfer-in could retain its own arrangement/segment within the overall plan or scheme with a single administrator.
 

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Other pensions need extra care

Defined benefits (DB) schemes:

Because they provide a guaranteed benefit in line with the scheme rules, transfers from DB schemes to DC arrangements – often to take advantage of flexible benefits – are considered safeguarded benefit transfers, most of which will require appropriate independent regulated advice (see below). It is not possible to transfer from unfunded DB schemes to a DC pension.
 

Safeguarded pensions

Certain types of pension benefits – those that are not money purchase or cash balance benefits – which contain a promise, including those with a guaranteed annuity rate (GAR), are considered safeguarded benefits. Where the cash equivalent transfer value (CETV) exceeds £30,000, independent advice is required from an appropriately qualified adviser before any transfer can proceed. Key considerations will include:

• Member’s state of health, likely life expectancy, marital status
• Need for access (before SRD), early retirement factors, and/or need for flexible benefits
• Sponsoring employer’s risk of insolvency
• Whether the safeguarded benefits represent a relatively small proportion of the member’s retirement income
• For GARs: attractiveness of terms versus current market rates

Overseas pensions

Rules for overseas pensions have been tightened over recent years such that many of their original advantages no longer apply. There are several reasons why UK residents may want to transfer their overseas pension to a UK arrangement. Read our artcile: Why more clients are choosing to move their overseas pensions back to the UK