From April 2027, revised inheritance tax (IHT) rules will affect some lump‑sum payments from defined benefit (DB) pension schemes, though married couples and civil partners remain exempt. The guidance, still being finalised by HMRC, leaves uncertainty over which payouts will trigger tax liabilities.

Death‑in‑deferment lump sums face IHT risk

HMRC has confirmed that lump sums paid after a member leaves employment – known as “death‑in‑deferment” payments – will be counted as part of the estate for IHT purposes. This contrasts with “death‑in‑service” benefits,which remain tax‑free under the new regime .

For beneficiaries other than a spouse or civil partner, the lump sum could be taxed at the standard 40% rate if the estate exceeds the £325,000 threshold. The rule applies even when the payment is a funeral grant, a detail that has raised concerns among scheme trustees.

Married couples and civil partners stay exempt

According to the government’s statement, transfers to UK‑tax‑resident spouses or civil partners will continue to be exempt from IHT. This exemption mirrrors current practice and provides certainty for most partnered retirees.

Steve Webb, the pension expert quoted in the source, notes that the exemption does not extend to other family members, meaning children or siblings could face tax charges on any lump‑sum they receive.

Unclear line between service and deferment payouts

HMRC has admitted that the distinction between “death‑in‑service” and “death‑in‑deferment” remains vague. The agency promised a detailed note and a timetable for forthcoming regulations,but stakeholders are still awaiting concrete definitions.

Industry observers warn that without clear guidance, scheme administrators may struggle to classify payments correctly, potentially leading to inadvertent tax liabilities for beneficiaries.

What HMRC says about the transition

An HMRC spokesperson told the source, “We want to help people get their tax right and we’re continuing to provide infrmation about how the taxation of unused pension funds and death benefit will work.” The department has already published a note outlining the expected rollout and promised further guidance in the coming months.

The spokesperson emphasized that the timetable will include both regulatory updates and practical guidance for scheme trustees and members.

Who still needs clarification?

Key unanswered points include: (1) the exact criteria that separate a death‑in‑service payout from a death‑in‑deferment one ; (2) whether any transitional relief will be offered to members who die before the rules take effect; and (3) how overseas‑resident beneficiaries will be treated under the new IHT framework.