Defined Benefit Pension IHT UK 2026: Death in Service, Spouse's Pension, April 2027 Changes, and DB Pension Estate Planning
Defined benefit (final salary) pension death benefits are generally outside the estate for IHT, the death in service lump sum is paid at trustee discretion (not in the estate); the spouse's pension is an annuity (not property). From April 2027, uncrystallised DB death in service lump sums enter the IHT scope, but spouse-exempt if nominated correctly. Ongoing scheme pensions: unaffected.
DB Pension IHT: Death in Service Outside Estate (Trustee Discretion); Spouse's Pension = Annuity = No IHT; April 2027 Changes for Lump Sums
CURRENTLY (to 05 April 2027): DB death in service lump sum = paid at scheme trustee discretion = NOT in member's estate = NO IHT. Spouse's/dependant's pension = annuity ceasing on death = NOT property = NO IHT. FROM 06 APRIL 2027: uncrystallised DB death benefits (member died before retirement) = within IHT scope. SPOUSAL EXEMPTION STILL APPLIES (s18 IHTA), nominate spouse as beneficiary of death in service lump sum to remain IHT-exempt after April 2027. Ongoing scheme pensions: NOT within April 2027 changes. Serious ill-health commutation: lump sum received = in estate from date received = IHT applies. S151 IHTA: scheme payments to members during lifetime not a transfer of value. Update expression of wishes every 2-3 years.
| Aspect | Rule / Principle | Example / Scenario | Planning Guidance |
|---|---|---|---|
| DB death in service lump sum: IHT treatment and the discretionary trust mechanism | DEATH IN SERVICE LUMP SUM FROM A DB SCHEME, WHY IT IS OUTSIDE THE ESTATE: a death in service lump sum paid by a DB (final salary or career average) occupational pension scheme is paid from SCHEME FUNDS held in trust by the pension scheme trustees. The lump sum is NOT the member's property, it belongs to the scheme until paid. The scheme trustees have a DISCRETIONARY POWER to pay the lump sum: (a) the member completes an 'expression of wishes' (nomination form) naming who they would like to receive the lump sum; (b) the trustees CONSIDER the expression of wishes but are NOT BOUND by it; (c) the trustees exercise their DISCRETION and pay to the nominated beneficiary (or wherever they consider appropriate). Because the lump sum is paid at the TRUSTEES' DISCRETION (not as a legal right of the nominee): the lump sum does NOT form part of the member's estate for IHT. IT BYPASSES THE ESTATE ENTIRELY. NO IHT is due on the lump sum, regardless of the member's other estate values or the size of the lump sum. CONTRAST WITH DC PENSIONS (SIPPS): DC pension death benefits (under-drawdown funds, uncrystallised pension pots) work on the same principle, paid at scheme trustee discretion (via nomination), and are similarly outside the estate for IHT to April 2027. FROM APRIL 2027: lump sum death benefits from registered pension schemes (including DB death in service) may enter the estate for IHT where they represent 'uncrystallised' or 'unused' benefits. THE DETAILS ARE COMPLEX: HMRC has confirmed that SCHEME PENSIONS (the ongoing pension income) will NOT be brought within the IHT net in April 2027, only lump sum payments where the member has an 'unused entitlement'. The interaction with DB schemes requires scheme-specific advice. EXCEPTED LUMP SUM DEATH BENEFITS: certain DB lump sum death benefits will be exempt from the April 2027 changes under transitional arrangements, HMRC consultation responses (December 2024) confirmed excepted group life schemes and scheme-specific arrangements will receive relief. SECTION 151 IHTA 1984, REGISTERED PENSION SCHEME EXEMPTION: s151 IHTA provides a specific exemption from IHT for registered pension schemes. Under s151(2) IHTA: where a pension scheme makes a payment out of scheme funds, that payment is not a transfer of value by the member for IHT purposes. This underpins the death in service exemption. | DEATH IN SERVICE WORKED EXAMPLE: James (age 52) is a NHS consultant with a DB final salary pension. James's death in service benefit: 3× salary = 3 × £120,000 = £360,000. James's own estate: £900,000 (house + savings). James's total potential 'estate' if the death in service lump sum were included: £1.26m. IHT WITHOUT DEATH IN SERVICE IN ESTATE: £900,000 estate − £325k NRB − £175k RNRB = £400k chargeable → IHT = £160k. IHT IF DEATH IN SERVICE INCLUDED: £1.26m − £325k NRB − £175k RNRB = £760k chargeable → IHT = £304k. ACTUAL POSITION, DEATH IN SERVICE OUTSIDE ESTATE: the NHS pension scheme trustees pay the £360k death in service lump sum at DISCRETION to James's nominated beneficiary (say, his wife Sarah). IHT on the lump sum: £0 (paid at discretion from scheme funds, not in James's estate). IHT on James's own estate (£900k): £900k − NRB (£325k) − RNRB (£175k) − TNRB from Sarah's unused NRB (£325k, assuming Sarah is also NHS and has not used her NRB) = £75k (if Sarah has TNRB available, assuming she used her NRB). Actually: James dies first, Sarah is surviving. James's estate to Sarah: SPOUSE EXEMPT (s18 IHTA). IHT on James's death: £0 (all to Sarah). James's NRB: unused → TNRB = £325k for Sarah's estate. James's RNRB: if home passes to Sarah: RNRB unused → TRNRB = £175k. DEATH IN SERVICE LUMP SUM: £360k paid to Sarah at scheme trustees' discretion. Not in Sarah's estate either (paid from scheme funds, discretionary). On SARAH'S subsequent death: her estate includes her own assets + whatever she has saved from James's assets and the lump sum. James's TNRB (£325k) and TRNRB (£175k) are available. Death in service lump sum: already spent/gifted by Sarah, no longer in the estate. | DB DEATH IN SERVICE PLANNING, KEY ACTIONS: (1) KEEP EXPRESSION OF WISHES UP TO DATE: the most important action for DB scheme members. The trustees will consider the expression of wishes when exercising their discretion. If the expression of wishes is outdated (e.g., still names an ex-spouse, or a deceased parent), the trustees may pay the lump sum to the wrong person, or be unable to follow the wishes at all. Review and update the expression of wishes: (a) after marriage or civil partnership; (b) after divorce or separation; (c) after the birth of each child; (d) whenever family or financial circumstances change. (2) NAME DISCRETIONARY TRUSTEES AS BENEFICIARY: for large death in service lump sums, consider naming a family discretionary trust (a separate trust, not the pension scheme) as the beneficiary in the expression of wishes. The scheme trustees pay the lump sum to the family discretionary trust → the family trustees then distribute at their discretion to family members. Benefits: (a) the lump sum is protected from the surviving spouse's care home fees; (b) the lump sum is protected from the surviving spouse's remarriage; (c) the family trustees can time distributions for tax efficiency. Caution: HMRC's post-April 2027 rules may require advice on the IHT treatment of lump sums paid to discretionary trusts. (3) COORDINATE WITH THE WILL: the death in service lump sum bypasses the estate, it does not form part of the estate to be distributed by the will. Ensure the will covers the REST of the estate without assuming the death in service lump sum is available to the estate. (4) SCHEME PENSION TO SURVIVING SPOUSE: the DB spouse's pension (50-66% of the member's pension) is an annuity, it dies with the spouse and has no capital value for IHT. No planning is needed. Ensure the spouse is correctly recorded as 'spouse' or 'nominated dependant' with the scheme to receive the spouse's pension. |
| DB pension and IHT April 2027: what changes for final salary and career average schemes | APRIL 2027 DB PENSION IHT CHANGES, THE DETAIL: Finance Act 2025 (amending the Inheritance Tax Act 1984 and the Finance Act 2004 pension provisions) extends IHT to 'unused pension funds and certain lump sum death benefits' from registered pension schemes from 06 April 2027. THE KEY DISTINCTION, SCHEME PENSIONS VS LUMP SUMS: (a) SCHEME PENSION (ongoing pension income): a DB scheme that pays an ONGOING PENSION INCOME to the member (and on the member's death, a continuing pension to the surviving spouse/dependants) is a PROMISE of income, not an identifiable pot of money. THE SCHEME PENSION IS NOT BROUGHT WITHIN IHT FROM APRIL 2027. The government confirmed in the December 2024 consultation response: ongoing scheme pensions and dependant/spouse pensions are NOT affected by the April 2027 changes. There is no 'unused fund', the promise ceases on death and the spouse's/dependant's pension continues as a new benefit. (b) DB LUMP SUM DEATH BENEFITS: where a DB scheme pays a lump sum on death (death in service, or a guaranteed period lump sum where the member dies before the guaranteed period expires): this IS a 'lump sum death benefit' under the Finance Act 2004 definitions. FROM APRIL 2027: these lump sums may be within scope for IHT IF they are from an 'uncrystallised' pension entitlement (i.e., the member died before taking their pension). The HMRC consultation response (December 2024) confirmed that: (i) UNCRYSTALLISED death benefits (member not yet retired, died during active service or deferment) from DB schemes: WITHIN SCOPE of the April 2027 IHT changes; (ii) CRYSTALLISED death benefits (member already drawing their pension, guaranteed period lump sum): the position is more complex, guidance expected. PRACTICAL POSITION FOR DB MEMBERS: (a) if the member dies BEFORE retirement (death in service): the death in service lump sum is within scope for the April 2027 IHT changes. (b) if the member dies AFTER retirement (receiving the DB pension): the ongoing pension ceases on death (no IHT); the spouse's/dependant's pension continues (no IHT); a guaranteed period lump sum may be within scope. APRIL 2027 MECHANISM, HOW DB LUMP SUMS ENTER THE ESTATE: under the proposed rules: the personal representatives (executors) of the deceased member must include the value of any in-scope pension death benefits in the IHT calculation. The pension scheme administrators (not the trustees) will report the lump sum value to HMRC. IHT is charged at 40% on the lump sum above the member's available NRB, RNRB, etc. THE EXEMPTIONS: spousal exemption (s18 IHTA) applies, lump sums paid to the surviving spouse (or civil partner) remain exempt from IHT under the spouse exemption even after April 2027. | APRIL 2027 DB PENSION IHT, WORKED EXAMPLE: Claire (age 58) is a retired teacher receiving her final salary pension of £28,000/year from the Teachers' Pension Scheme (TPS). Claire died on 01 July 2027 (after April 2027, new rules apply). CLAIRE'S PENSION BENEFITS ON DEATH: (a) Claire's own pension: ceases on death, no IHT (annuity ceased). (b) Spouse's pension: Claire's husband David receives 37.5% of Claire's pension = £10,500/year from the TPS. This is an ongoing annuity, NOT within scope for IHT (it is a continuing income promise, not an unused fund). No IHT. (c) Guaranteed period: Claire's TPS pension has a 5-year guaranteed period. Claire has received 2 years of pension (retired in 2025; died in 2027). 3 years of guaranteed pension remain: 3 × £28,000 = £84,000 lump sum payable by the TPS. POSITION UNDER APRIL 2027 RULES: this is a 'crystallised' lump sum death benefit (Claire had already retired and was drawing her pension). The April 2027 treatment depends on HMRC guidance on crystallised benefits, NOT yet fully clarified. SCENARIO: assume HMRC treats the guaranteed period lump sum as within scope. Claire's estate for IHT: own assets (£400k) + guaranteed period lump sum (£84k) = £484k. Thresholds: Claire's NRB (£325k) + RNRB (£175k if home passes to direct descendants) = £500k. £484k < £500k → IHT = £0. COMPARISON, DEATH IN SERVICE EXAMPLE AFTER APRIL 2027: Mark (age 45) is an active NHS consultant (still working). Mark dies on 01 July 2027. Death in service lump sum: 3 × £100k salary = £300k. Under April 2027 rules: this is an UNCRYSTALLISED death benefit from a DB scheme. WITHIN SCOPE. Mark's estate: own assets (£700k) + pension death benefit (£300k) = £1m. Thresholds: NRB (£325k) + RNRB (£175k) = £500k. Chargeable: £1m − £500k = £500k → IHT = £200k. SPOUSE EXEMPTION: if Mark nominated his wife Jane as beneficiary of the death in service lump sum: IHT on the lump sum = £0 (spouse-exempt). IHT on Mark's own estate (£700k to Jane): also spouse-exempt. Total IHT = £0. TNRB for Jane: Mark's full NRB and RNRB unused → TNRB + TRNRB available for Jane's estate. | APRIL 2027 DB PENSION PLANNING, PRIORITY ACTIONS: (1) REVIEW EXPRESSION OF WISHES, NOMINATE SPOUSE: from April 2027, a death in service lump sum nominated to the SURVIVING SPOUSE is spouse-exempt under s18 IHTA, no IHT even if brought within the estate. If currently nominated to children or other beneficiaries: the lump sum will be within the estate for IHT and chargeable above the NRB. For estates above the NRB + RNRB: nominating the spouse for the death in service lump sum is the most efficient short-term action. (2) CONSIDER A SPOUSAL BYPASS TRUST: where the surviving spouse already has a large estate (and receiving the death in service lump sum would push the combined estate into high IHT territory on the survivor's death): a spousal bypass trust (a discretionary trust nominated as the beneficiary of the death in service lump sum) keeps the lump sum outside both the member's estate (IHT, discretionary payment) AND outside the spouse's estate (the lump sum goes into the discretionary trust, not to the spouse directly). Post-April 2027: check whether HMRC's new rules apply to payments to a bypass trust, the mechanism relies on the TRUSTEE DISCRETION making the payment not part of the member's estate. (3) EARLY RETIREMENT PLANNING: members close to retirement age (55-57+) should consider whether taking the DB pension early (crystallising) before April 2027 removes the pension from the scope of the new rules. Once the member is receiving the pension (crystallised), the death-in-service death benefit converts to a guaranteed-period benefit, which may have a lower IHT impact. Timing: if the member plans to retire in the next 12-24 months, consider bringing retirement forward to before April 2027. (4) HMRC GUIDANCE, WAIT AND SEE: HMRC is still publishing detailed technical guidance on exactly which DB death benefits are within scope from April 2027. Specific scheme rules will determine the treatment. Seek specialist advice from a financial planner and solicitor before taking action, the April 2027 rules are not yet fully settled in all details. |
| DB commutation, serious ill-health lump sums, and trivial commutation: IHT analysis | COMMUTATION OF DB PENSION BENEFITS, IHT ANALYSIS: DB pension schemes allow members to take a portion of their pension as a tax-free cash lump sum on retirement (the pension commencement lump sum, PCLS, commonly 25% of the pension value). The PCLS is paid to the member during their lifetime, it becomes PART OF THE MEMBER'S ESTATE from the moment it is paid. Unlike death in service lump sums (paid at trustee discretion, not in the estate), the PCLS is a RIGHT of the member: the member asks for it, receives it, and it is their property. If the member dies shortly after receiving the PCLS without spending it: the PCLS is in the member's estate and taxed for IHT at 40% above the available NRB. SERIOUS ILL-HEALTH COMMUTATION (s161 Finance Act 2004): where a member is in serious ill-health (life expectancy less than 1 year), the DB scheme can commute the ENTIRE pension value to a lump sum (instead of paying a pension income). The lump sum is paid to the member as a lump sum. This is the FULL commuted value of the pension, the pension is extinguished. IHT ON SERIOUS ILL-HEALTH COMMUTATION: the commuted lump sum is received by the member and becomes part of their estate. IHT applies if the member dies soon after receiving the lump sum. The CRITICAL TIMING ISSUE: under s160 IHTA, any property in the estate on death is taxable. If the member receives a £500k serious ill-health commutation and dies 6 months later without spending it: the £500k is in the estate → IHT at 40% on the amount above the NRB. CONTRAST: if the member had NOT commuted and had died while still receiving the pension: the DB pension would have ceased (no capital in the estate) and the spouse's pension would continue (not in the estate). A MEMBER IN SERIOUS ILL HEALTH SHOULD CONSIDER CAREFULLY whether to commute: the commuted lump sum brings capital into the estate (IHT); the un-commuted pension pays income that can be spent tax-efficiently during the member's remaining life. TRIVIAL COMMUTATION: where the TOTAL value of all a member's pension rights under all registered schemes does not exceed £30,000 (2026-27): the entire pension can be commuted to a lump sum (trivial commutation). The lump sum is part of the estate from the date received. IHT applies if the member dies with the lump sum unspent. | SERIOUS ILL-HEALTH COMMUTATION, IHT COMPARISON: Joan (age 72) has a DB pension of £20,000/year. Joan is diagnosed with terminal cancer, life expectancy 8 months. Joan's DB scheme offers a serious ill-health commutation of £340,000 (the commuted value of the remaining pension). Joan's current estate (excluding pension): £450,000. OPTION A, COMMUTE THE PENSION: Joan receives £340,000. Joan's estate: £450k + £340k = £790k. If Joan dies in 8 months without spending the commutation: IHT = 40% × (£790k − NRB £325k − RNRB £175k) = 40% × £290k = £116k. Net estate to family after IHT: £790k − £116k = £674k. OPTION B, DO NOT COMMUTE: Joan receives ongoing pension income (£20,000/year) for 8 months = approx. £13,333 of pension income received. Joan spends most of this income. Joan's estate at death: ~£450,000 (no commutation lump sum). IHT = 40% × (£450k − £325k NRB − £175k RNRB) = 40% × (−£50k) = £0 (below threshold, no IHT). Spouse's pension from Joan's DB: £10,000/year to Joan's surviving spouse, NOT in Joan's estate. FAMILY OUTCOME: Option A (commute): family receives £674k total but pays £116k IHT. Option B (do not commute): family receives £450k estate (no IHT) + £10k/yr spouse's pension for life (tax-free if within personal allowance). If the spouse lives 20 more years: £10k × 20 = £200k of pension income. Total value: £450k + £200k (approx.) = £650k, less IHT than Option A. CONCLUSION: in this example, NOT commuting is better, particularly because commutation brings capital into the estate which is then subject to 40% IHT. Each case must be modelled individually. | DB PENSION PLANNING, HOLISTIC CHECKLIST: (1) UNDERSTAND EXACTLY WHAT YOUR DB SCHEME PROVIDES: read the scheme's member guide or contact the scheme administrator to confirm: (a) death in service lump sum (before retirement), amount and who receives it; (b) guaranteed period (on death after retirement), how many years; (c) spouse's/dependant's pension, percentage and qualifying conditions; (d) commutation factor, how much cash per £1 of pension given up; (e) serious ill-health commutation, is it available? (2) UPDATE EXPRESSION OF WISHES EVERY 2-3 YEARS: the expression of wishes is the MOST IMPORTANT administrative action for DB scheme members. Write a clear letter naming primary and contingent beneficiaries; explain the family context briefly (so trustees understand your wishes). Update after every major life event. (3) COORDINATE THE DB PENSION DEATH BENEFITS WITH THE WILL: the death in service lump sum and spouse's pension bypass the will and the estate entirely. The will only covers the member's OWN personal assets. A holistic estate plan must consider both: (a) the DB pension death benefits (outside the will); and (b) the personal estate (covered by the will). These must complement each other, avoid double-counting or leaving gaps. (4) POST-APRIL 2027 PLANNING WINDOW: for DB members aged 55+ who are considering retirement, the NEXT 12-18 MONTHS are a critical planning window. Taking the pension before April 2027 (if possible and financially appropriate) 'crystallises' the benefit, potentially removing the death in service lump sum from the April 2027 IHT scope. Model the IHT impact with a financial planner before deciding. |
Defined benefit pension IHT UK 2026 and April 2027 changes. IHTA 1984 references: s151 IHTA (registered pension scheme exemption, payments from registered schemes to members not transfers of value); s18 IHTA (spouse exemption, applies to death in service lump sums paid to surviving spouse); s160 IHTA (property in the estate on death, commuted lump sums received before death are in the estate). Finance Act 2004: ss152-168 (registered pension scheme rules); s161 (serious ill-health commutation, allows full commutation where life expectancy less than 12 months); pension commencement lump sum (PCLS), the 25% tax-free cash on retirement under the tax-free cash rules (now 25% of fund up to the lump sum allowance of £268,275 in 2024-25). Finance Act 2025 (implementing the April 2027 pension IHT changes): introduces new IHT provisions for 'unused pension funds and certain lump sum death benefits' from registered pension schemes from 06 April 2027. HMRC consultation: 'Inheritance Tax on pension death benefits' (July 2024, responses December 2024). Key findings: (1) ongoing scheme pensions and dependant's/spouse's pensions NOT within scope; (2) uncrystallised lump sum death benefits from DB schemes WITHIN scope; (3) crystallised pension benefits, detailed rules still being finalised; (4) spousal exemption (s18 IHTA) applies to in-scope pension death benefits paid to surviving UK-domiciled spouse. Expression of wishes: nomination form held by scheme administrator; trustees consider but are not bound by nominations. Guaranteed period: a DB pension guaranteed for a minimum number of years, on the member's death during the guarantee period, the balance of the guarantee is paid as a lump sum or continuing pension (scheme-specific). Trivial commutation: all pension rights across all registered schemes ≤ £30,000 total (2024-25); can be taken as a lump sum, enters estate on payment. Small pots commutation: individual pots ≤ £10,000 from occupational schemes (up to 3); personal pensions ≤ £10,000 (unlimited). Serious ill-health commutation: s161 FA 2004, requires scheme actuary certification; member must have less than 12 months' life expectancy. The full fund value is paid as a lump sum (less income tax at marginal rate); normally taken to provide capital for the family before death.
Frequently Asked Questions
Is a defined benefit (final salary) pension subject to IHT?
Generally no, for most DB pension benefits. The ongoing scheme pension (monthly income) ceases on death and the spouse's/dependant's pension continues as a new income stream, neither is property for IHT. The death in service lump sum (paid before retirement) is paid at the scheme trustees' discretion from scheme funds, not the member's property, so it is outside the estate for IHT. From April 2027, HMRC is extending IHT to lump sum death benefits from registered pension schemes (including DB schemes), but ongoing scheme pensions and spouse's pensions are confirmed as outside the April 2027 changes.
Will my DB pension death in service benefit be taxed for IHT after April 2027?
It depends on whether the lump sum is from an 'uncrystallised' benefit (member died before taking the pension). HMRC's December 2024 consultation response confirmed that uncrystallised death benefits (where the member died in service or in deferment) from DB schemes are within scope of the April 2027 IHT changes. The SPOUSAL EXEMPTION (s18 IHTA) still applies: if the lump sum is paid to the surviving spouse, no IHT is due. Nominating the spouse as the beneficiary of the death in service lump sum avoids IHT from April 2027. Ongoing scheme pensions and dependant's pensions are NOT within scope, confirmed by HMRC.
What is the IHT treatment of the spouse's pension from a DB scheme?
A spouse's or dependant's pension from a DB scheme is an annuity, a promise to pay income during the surviving spouse's lifetime. It ceases on the surviving spouse's death. There is no capital value for IHT, an annuity that expires on death is not property. The spouse's pension is NOT in the surviving spouse's estate for IHT and is NOT affected by the April 2027 pension IHT changes. The surviving spouse simply includes the pension income in their self-assessment (income tax applies; not IHT).
Should I commute my final salary pension if I am seriously ill?
Only after careful IHT analysis. Commuting a DB pension in serious ill health converts a future income stream into a capital lump sum, the lump sum is immediately in your estate and subject to IHT at 40% if you die above the NRB. If you do NOT commute: the pension income is spent during your remaining life (reducing the estate naturally); the spouse's pension continues after your death (outside the estate); and there is no capital lump sum for IHT. In most cases of serious ill health, NOT commuting is more IHT-efficient, but the decision depends on the amount, the estate size, and the available NRB/RNRB. Seek specialist advice from a financial planner and solicitor before commuting under serious ill-health provisions.
How do I update my expression of wishes for my DB pension?
Contact the scheme administrator or HR department and ask for an 'expression of wishes' or 'nomination of beneficiaries' form. Complete it naming your preferred beneficiaries for any discretionary death benefits (typically the death in service lump sum). The scheme trustees consider but are not bound by the form. Review it every 2-3 years and after every life event (marriage, divorce, birth of children, death of a named beneficiary). For post-April 2027 planning: ensure the surviving spouse is nominated as the primary beneficiary of any death in service lump sum, the spousal exemption (s18 IHTA) ensures no IHT on the lump sum paid to the spouse, even under the new rules.
Final Salary Pension Member? Update Your Expression of Wishes and Will Before April 2027
The April 2027 pension IHT changes affect DB death in service benefits. Nominating your spouse as beneficiary of the death in service lump sum keeps it spouse-exempt under the new rules. WillSafe kits for the personal estate; financial planner for pension nomination and retirement timing advice.
View Will Kits from £39.99