In a previous edition of Wealth Matters, we highlighted the benefits of a streamlined retirement plan, where pension pots accumulated throughout a working life are consolidated into a single arrangement. The forthcoming changes to pension legislation from 6 April 2027 strengthen the case for consolidation further. We look again at the benefits pension consolidation brings, and at the difficulties personal representatives will face when dealing with an estate after April next year.
Benefits of consolidation
Pension consolidation is a sensible step in many situations. A single pension arrangement, rather than several pots with different providers, makes the combined value of your pension savings easy to see and track. It can also bring administrative benefits, and modern pension contracts often cost less than legacy arrangements.
The most valuable benefit of pension consolidation comes when you draw your retirement savings. A single plan with access to all available pension income options simplifies retirement planning, whereas trying to construct a cohesive strategy across multiple separate pension plans adds unnecessary complexity and risk.
New rules from April 2027
Under current rules, most personal and workplace pensions sit outside your estate for Inheritance Tax (IHT) purposes. Since Pension Freedoms were introduced in 2015, this has made pensions a tax-efficient way to pass wealth between generations.
From 6 April 2027, unused pension funds will generally be included in the value of an estate and assessed for IHT. As a result, pensions cannot be viewed in isolation, and a holistic approach to retirement and estate planning, covering all aspects of an individual’s wealth, will become essential to avoid unwanted tax liabilities on death.
Additional steps for executors
This change in legislation does more than underline the importance of a sound financial plan. It could also create considerable extra work for your personal representatives (executors) and loved ones when dealing with unused pension funds on death.
From April 2027, executors must gather details of every pension arrangement held by the deceased. This is needed to assess the value of the benefits that count towards the IHT calculation. Executors must contact each pension scheme administrator in turn to request the value of any unused pension funds and death benefits payable. Once they have this information, they add it to the IHT calculation. Executors must also decide how to settle any IHT due on the pensions, either by issuing a payment notice to the pension scheme administrators or by settling the IHT from other assets in the estate.
The need to act quickly
IHT on an estate is normally payable within six months of the end of the month in which the person died. Beyond this point, HMRC charges daily interest on unpaid IHT. The rate of interest applied is linked to the Bank of England base rate and is currently charged at 7.75%. The Government has rejected industry calls to extend this deadline for pension assets, so the same six-month rule will apply to pensions as to the rest of the estate.
To avoid unnecessary interest penalties, executors need to act quickly. Obtaining information on existing pensions takes time. Under current guidance, pension scheme administrators must respond to an executor’s request for a valuation within 28 days or provide an estimated value if they cannot meet that deadline. We will wait to see how these timescales work in practice.
Issues caused by multiple and missing pensions
Many people hold multiple pension pots, built up over a lifetime through workplace schemes or personal pensions. Holding multiple arrangements forces the executor to contact each scheme administrator in turn, which can lead to delays and unnecessary interest charges.
Beyond the time taken to contact each pension scheme, the personal representative must calculate the combined value of multiple pensions and apportion the available Nil Rate Band and Main Residence Band across the pension and non-pension assets.
An added complication arises when executors are unaware of all pension plans held by the deceased. According to 2024 research from the Pensions Policy Institute, an estimated 3.3 million pension pots in the UK are lost, holding a combined £31.1 billion in assets. This happens when people lose touch with a pension scheme administrator or simply forget a pension has accrued. It is most common among people who are automatically enrolled into a workplace pension and change jobs regularly. Discovering another pension arrangement after submitting an IHT calculation could lead to personal representatives having to recalculate the IHT liability, causing further delay and potentially additional interest.
Advice before proceeding
A straightforward way to reduce the burden on executors and families at a difficult time is to consolidate pension arrangements into a single pot. Care should be taken to avoid disturbing active pension schemes where employer and employee contributions are still being paid in. Furthermore, some pension contracts set up many years ago carry guaranteed benefits, such as guaranteed annuity rates, which could be lost if the pension is transferred.
Where pensions are deferred or inactive, however, moving them into a single pot is often the right course of action. This can bring immediate benefits, providing a clearer view of your retirement savings, and potentially improved performance through a cohesive investment plan. Over the longer term, consolidating your plans can save your executors significant work, and reduce delay and cost for surviving family members and beneficiaries.
Our experienced advisers can carry out a full audit of your existing pension arrangements. We can provide an independent and unbiased assessment of the features, fund availability, and performance of each plan you hold, along with your retirement options. We can recommend low-cost platforms that offer full access to the options available under pension freedoms, and where appropriate can provide advice and facilitate the consolidation of your deferred pensions. Speak to one of the team to start a conversation.
