Bereaved families could face long delays accessing pension money left behind by loved ones under major inheritance tax changes due to take effect next year.
Some families may be unable to access up to half of inherited pension funds for more than a year while tax liabilities are calculated.
HM Revenue & Customs confirmed this week that people responsible for administering estates will be able to instruct pension providers to hold back up to 50 per cent of inherited pension benefits for as long as 15 months after a death.
The move comes ahead of new rules being introduced from spring 2027, when unused pension savings will become subject to 40 per cent inheritance tax alongside property, investments and other assets for the first time.
The changes are expected to make the probate process more complicated for families, who will need to contact pension providers to gather the information required to calculate inheritance tax bills.
Former pensions minister Steve Webb, now a partner at consultancy LCP, described the new withholding mechanism as “quite nuanced” in its effects.
“It’s obviously not good for beneficiaries that they may have to wait longer, but it’s helpful to the executor to be able to put a hold on part of the payment to cover the IHT bill,” he said.
Mr Webb suggested that experienced executors would likely recognise early in the process whether inheritance tax posed a concern, though he noted there remained “a strong incentive to put a hold on just in case.”
The former minister highlighted that children inheriting from parents face particular risks from the new rules, whereas spousal inheritance presents little danger of tax liability.
The changes are expected to make the probate process more complicated for families
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PAPensions have traditionally provided rapid financial support for bereaved families since they sat outside the estate and could be released quickly.
Neil Jones, tax and wealth planning specialist at Standard Life, outlined the practical realities facing those administering estates under the new regime.
Personal representatives must calculate the total estate value within the first three months, incorporating property, savings and the notional value of pension benefits subject to inheritance tax.
The tax bill itself must typically be settled within six months of the month in which death occurred, with interest charges of 7.75 per cent applying thereafter.
Pensions have traditionally provided rapid financial support for bereaved families
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GETTYMr Jones warned that tracking down all pension pots would present a significant challenge for families.
“Those approaching retirement today typically have two or three pensions, but younger generations are expected to have 11 or 12 pots over their working lives, largely due to job mobility and pensions auto enrolment,” he said.
Inheritance tax applies at 40 per cent on estates exceeding £325,000 for individuals or £650,000 for married couples, with thresholds rising to £500,000 and £1million respectively when a family home passes to direct descendants.
Payments to surviving spouses or civil partners remain exempt from death duties and can be released immediately by pension providers.
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GETTYPayments to surviving spouses or civil partners remain exempt from death duties and can be released immediately by pension providers.
Mr Jones emphasised that withheld funds are not forfeited but merely delayed until the tax position becomes clear.
“While this process may delay access to some funds, it is designed to protect beneficiaries by ensuring the correct tax is paid and helping to avoid unexpected liabilities later on,” he said.
Three payment options exist for settling the bill: from general estate assets, directly from the pension via the provider to HMRC, or by beneficiaries themselves.