Inheritance tax and pensions - make sure the expression of wishes complements the will

For deaths after 5 April 2027, the deceased’s unused pension funds will form part of their taxable estate for inheritance tax purposes. Who receives death benefits from the pension scheme is determined by the pension scheme administrators (PSAs) and not by the provisions of the deceased’s will for most pensions, i.e. those paid under discretionary powers.

Where a will leaves a legacy to a beneficiary, the deceased’s personal representatives (PRs) must comply with the provision to pay that legacy to, or for the benefit of, the beneficiary.

If an individual dies without a valid will, the estate is distributed according to the laws of intestacy. For most, intestacy means that the PRs must distribute the estate to a surviving spouse and children in defined proportions.

The PSAs of a pension scheme have discretion as to who they pay death benefits, having the ability to choose from a list of potential beneficiaries in the Scheme Rules and being guided by an expression of wishes. The expression of wishes therefore becomes very important, not just in terms of who benefits but also with regard to the inheritance tax effects on the pension death benefits. An expression of wishes is not binding on the PSAs, whereas a provision in the individual’s will is binding on the PRs.

The practical impact is that PSAs have more flexibility as to who should benefit on a pension scheme member’s death and, within reason, can choose beneficiaries who do not necessarily benefit under the individual’s will. This can be particularly important for blended families.

Example: Ronald

Ronald is married to his second wife, Betty, and has two adult children from his first marriage. He owns their home worth £500,000, £200,000 of investments and has a personal pension worth £300,000. Ronald’s will, made during his first marriage, became invalid when he remarried. Like many, he has never updated his will. On his death, his estate passes in accordance with the intestacy rules so that £322,000 passes to Betty, with the balance of his estate split 50/50 between Betty and Ronald’s children.

Betty’s total entitlement is £511,000 so she will be able to inherit the whole house but very little of Ronald’s investments. To deal with this, if an appropriate expression of wishes exists, the PSAs of Ronald’s pension scheme could consider exercising their discretion to appoint some, or all, of Ronald’s £300,000 death benefits to Betty. If Ronald dies after 5 April 2027, there will be no inheritance tax on the death benefits passing to Betty. The remaining death benefits passing to Ronald’s children may be covered, in full or part, by Ronald’s available nil rate band. The position would not have been so clear cut had an expression of wishes not existed, particularly if Betty does not have a good relationship with Ronald’s children.

Many know who they wish to benefit from their estate and pensions on death. But, for others, particularly those with blended families, the position may not be so clear.

The onset of the new inheritance tax and pensions rules means that such people will need to revisit their wills and expressions of wishes to make sure the beneficiaries under their estate and pension schemes are those they wish to benefit, that appropriate equality exists between beneficiaries and that their arrangements are as tax efficient as possible.

Who pays the inheritance tax on pension funds?

As discussed in last month’s article, where death occurs after 5 April 2027, PRs are responsible for apportioning any available nil rate band between the estate and notional pension assets and working out the inheritance tax payable on both components.

Legally, the PRs will be liable for the inheritance tax liability on notional pension assets, even though they don’t own them (or any element of the estate, unless the are also beneficiaries). However, they can serve the PSAs with a notice that they must retain up to 50% of the value of the pension scheme assets likely to be subject to inheritance tax, for up to 15 months, to help meet tax liabilities and interest. They can also serve the PSAs with a further notice instructing them to pay their part of the inheritance tax and any interest direct to HMRC.

Once death benefits are vested in the beneficiaries, those individuals automatically become jointly liable for the inheritance tax alongside the PRs. This joint liability provides a vital safety net if the primary PSA notice system fails—for instance, if a notice is never served or expires after 15 months. In those scenarios, the PRs can instruct the beneficiaries to pay their share of the tax directly. Alternatively, if the death benefits are still held within the pension scheme, the beneficiaries can instruct the PSAs to make the payment on their behalf.

Where the beneficiaries or the PSAs pay the inheritance tax, an income tax credit will be available on that part of the death benefits used to meet the inheritance tax.

Example: Roxanne

Roxanne is married to her second husband, Kurt. She has adult children from her first marriage. Under Roxanne’s will, Kurt receives all of her estate, which mainly comprises the family home. Roxanne would like her adult children to benefit from some, if not all, of her £650,000 pension funds. Whilst she can set out her wishes under an expression of wishes, she would then be relying on the PSAs to carry out her wishes.

Should the PSAs respect Roxanne’s wishes and pay the benefits to her 2 children, an inheritance tax liability of around £130,000 would arise on these. The PRs would be primarily liable for this liability but the only assets they own is Roxanne’s house and they might find it difficult to collect the tax from the Roxanne’s children. It would therefore be essential that they serve the PSAs with a retention (and perhaps a payment) notice in order to avoid difficult later discussions with Roxanne’s children with whom they might not enjoy an amicable relationship.

If you, or someone you know, would like guidance on succession planning or inheritance tax matters, contact us to arrange a free initial consultation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The information in the article is based on current laws and regulations which are subject to change as at future legislations. 

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

The information in this article is correct as at 24/06/2026.

The Financial Conduct Authority does not regulate tax advice, trusts, will writing or estate planning.