Unused pensions will be in scope for inheritance tax from April 2027, so does it still make sense to keep pensions outside of wills and intestacy rules through trustee discretion?  

Bringing pensions into scope for IHT is no small undertaking, and HM Revenue and Customs is still working out the details of how it can be done. Some fear the change will catch middle-income families in areas with high property prices unawares, potentially adding stress at a time when they are vulnerable, while others agree that pensions should be taxed like any other asset.  

The IHT change also means the expression of wish form becomes more important. Worryingly however, Howden's recent survey of large defined contribution schemes found the majority of schemes report expression of wish completion rates below 40%.  

As inherited pensions become taxable and people fail to express their wishes to schemes, the question arises: should pensions still be under trustee discretion? If pensions are lumped with the rest of the estate for tax purposes, why are they still treated differently? 

Exercising trustee discretion is a delicate undertaking. It requires establishing the facts – which is not always straightforward – and applying sound judgment about not just what the deceased would have wanted but what financial responsibilities they had to others, says Alastair Meeks, a client director at trustee firm Zedra Governance.  

Meeks believes the system as it currently stands works well, even if it might seem counterintuitive that pensions are treated differently while being taxed as part of the estate.  

There is one main reason why Meeks feels it should stay this way. If pensions were to fall under wills and intestacy, it would force people who might need the money quickly to apply – and wait – for probate even in cases where there are few to no non-pension assets.  

"For it to go to the estate... someone's going to have to get probate when they wouldn't otherwise have got probate," he said. "It's going to take months, and you're taking much longer than you would take in a typical case at present for precisely the [people] who need the money now."  

Probate usually takes three months or more. In contrast, trustees can act relatively quickly; on average, group life payments under discretionary trust are paid within 60 days at Zedra, he says, with most cases taking less long.  

"Without a process of probate, which is going to require quite substantial changes, we have in place a system that works and works pretty well," he says. "People get their money quickly. Trustees are able to take proper regard of expression wishes forms."  

Where the family circumstances are more complex, they also already look at wills, he adds.  

Meeks points out that trustees who have discretion can currently ensure that anyone who is financially dependent on the deceased is not overlooked by an expression of wishes form that might be out of date, or where the deceased simply did not consider these dependencies.  

The IHT change next year will inevitably cause some problems, he expects, but sees it as the right move.   

However, "where it does get complicated, and where I do think the government perhaps hasn't given enough thought, is where you look at death benefits of all sorts within a pension scheme or within a group life scheme. Pretty well by definition if you're paying out death in service, you're paying out to people who have not been doing inheritance tax planning," he says. "That's not true of absolutely everyone, but it does mean that you're dealing with a very different set of circumstances; and whether that needed to be brought within the net of inheritance tax, I am less convinced." 

While death in service benefits held in group life trusts are expected to be exempt from the IHT requirements, any pension amounts left in a scheme will fall under the IHT rules. 

Trustee discretion enables faster payment and prevents benefits becoming tied up in probate, agrees Jeni Flanagan, head of large DC clients at Howden. However, she acknowledges that with the IHT change, pensions will in future occupy a hybrid position, being outside the will for succession purposes, but inside the estate for tax purposes.   

This might create complexity where pension beneficiaries differ from will beneficiaries, as the IHT liabilities will need to be coordinated across assets but are subject to different distribution mechanisms, says Flanagan.  

It also means that "the expression of wish form is now doing more work than ever", despite a minority of pension savers filling it in. The fact only 40% do so is " a telling proxy" for how engaged members are with what happens to their pension on death, she believes.  

Flanagan is supportive of keeping the system, saying the 2027 reform shows "government has found a route to tax pension wealth without disturbing how it is distributed".  

The inclusion of pensions in estates for tax purposes could still cause some issues, however. The majority (62%) of those with DC workplace pensions have no knowledge of the IHT changes, according to Howden, raising the question of when and how trustees should alert them.  

Flanagan says there is merit in schemes raising awareness early rather than waiting for all operational guidance to be finalised, but notes that most schemes appear to be waiting for now. The government estimates about 10,500 additional estates will pay IHT, with roughly 38,500 facing higher bills, which is a minority of the estates that include pension wealth, according to Flanagan.  

Where communication is happening, trustees do this through newsletters, benefit statements and targeted messaging to older members and those with larger pots, signposting members to guidance rather than giving tax advice, she says, and adds: "One message we would encourage is for communications to highlight that the new rules introduce additional information-sharing and tax administration requirements, which may mean estate administration and settlement of pension death benefits takes longer in some cases than members and beneficiaries are currently used to."