Pensions and IHT – should clients’ Expression of Wish be updated now?

Key points:

• The proposal for IHT to apply to unused pension funds relates to deaths after April 2027.
• Best practice is to complete an Expression of Wish form assuming the client dies tomorrow – it can be updated should circumstances change.
• If a client dies with an out-of-date Expression of Wish, the trustees should be provided with any relevant information before they make their decision on how the benefits are distributed.

As you will know, the former Chancellor announced in the October 2024 Budget that the majority of unused pension funds, including discretionary arrangements, will be subject to Inheritance Tax from April 2027. 

Following that Budget, I have had countless conversations with advisers about what this means for financial planning both now and when the new rules take effect. It’s worth noting the legislation to bring pension funds within the scope of IHT affects deaths that occur on or after 6 April 2027 and so pensions remain outside the scope of IHT if death occurs before that date. That can cause a dilemma when updating an Expression of Wish form.

Do Expression of Wish forms for discretionary arrangements need updating now?

In my opinion, an Expression of Wish form should always be completed on the basis of what the client would want to happen should they pass away tomorrow, as opposed to attempting to complete a form that deals with every potential future scenario.

As such, it would seem sensible to review how the client would like benefits distributed should the worst happen before and after 6 April 2027. While the next review may be before the implementation of the new rules, the legislation change may mean a more detailed discussion is required regarding the amounts and recipients of pension benefits on death. This is due to the fact that, as all advisers will know, any IHT generally falls on the second death when dealing with a married couple or civil partnership. Any benefits paid to the spouse or civil partner on the first death will not be subject to an IHT assessment (subject to residency) but will increase the value of the estate on the second death (which, if occurring after April 2027, may also include pension funds). It would therefore be prudent to have a conversation about what level of benefits should pass to the spouse or civil partner and what benefits should be paid to other potential beneficiaries (e.g. children) should death occur before the new rules are implemented.

Of course, if the rules are implemented as proposed, then the Expression of Wish may need further amendment before 6 April 2027 with consideration given to the IHT consequences of death occurring after that date. Therefore, it may be prudent to consider a second Expression of Wish to take effect after 2027.

What if a client dies before the Expression of Wish is amended?

Of course, in an ideal world, the Expression of Wish will be up to date when the client dies. However, there may be situations where this is not the case.

With discretionary pension arrangements, the decision as to how death benefits are distributed is made by the Pension Scheme Administrators, acting as trustees for the pension scheme. It is this discretion which ultimately leads to the (current) treatment of pension funds, where they are excluded from the estate for IHT purposes. The law is clear that the “trustees” must consider all relevant matters and must not take account of any irrelevant matters before reaching their decision. The law also requires trustees to reach a “reasonable” decision. The courts and the Pension Ombudsman are clear they won’t interfere with the outcome of the trustees’ decision, but they will examine the process by which the trustees got there. As a general rule, trustees have an additional duty of care for any potential beneficiaries that were legal or financial dependants of the deceased member.

What does this mean in practice?

It’s very important that potential beneficiaries provide pension trustees with all relevant facts before they reach a decision. For this purpose, scheme administrators will often request additional information, such as a copy of the will, marriage certificates, etc., or details of financial dependency. Fidelity also asks for any additional information to be provided before the decision is made.

Advisers can help smooth this process by ensuring administrators receive any additional information they would like the trustees to consider. For example, the Expression of Wish may be written 100% in favour of a spouse, but the spouse already has sufficient assets and doesn’t want to be considered for the benefits. In this case, the trustee would want to satisfy themselves that the spouse is financially secure and would want confirmation from the spouse that they don’t want to be considered. It is likely they will require this to be in writing, independently witnessed by someone like a solicitor.

The important thing is to provide the trustees with the additional information to be considered, as opposed to attempting to instruct them what to do. It may sound like semantics but it is essential trustees are seen to act with discretion.

Can a decision be challenged?

As I previously mentioned, if the trustees have reached a reasonable decision after considering all facts, it is extremely difficult to overturn this decision. To be clear, a reasonable decision does not necessarily mean all potential beneficiaries are content with the outcome.

It’s also important to be aware of Finance Act 2004 - Section 172A, which says that (paraphrasing) “If a person surrenders or agrees to surrender any benefit to which the person has a prospective entitlement, the pension scheme is to be treated as making an unauthorised payment”.

This is why it’s important to supply the information before a decision is made, rather than attempting to challenge the decision retrospectively.

Summary points

• Best practice is to complete an Expression of Wish form assuming the client dies tomorrow and avoid conflating this by attempting to cover all future scenarios.
• Remember that an Expression of Wish can be updated should circumstances change.
• It is proposed that IHT will be applicable to unused pension funds, but only for deaths after April 2027.
• Should a client die with an out-of-date Expression of Wish, ensure the trustees are provided with any relevant information that you would like them to consider before a decision is made.

You will find more insights on pensions and death benefits in the Technical Matters section of our website.