Last month, you may have read about the Swedish concept of death cleaning that can help your loved ones sort through your belongings after you’re gone.
Now, we’re turning to the administrative side of things as executors of estates are being tasked with greater obligations from April 2027 onwards.
From April 2027, unused pensions will be included in an estate for Inheritance Tax (IHT) purposes for the first time.
While this will have implications for estate planning, retirement income, and IHT bills, one of the lesser-known impacts of these changes will be an increased burden placed on the role of executor.
Read on to find out more about the new demands of this role and how to make sure you’ve appointed the right executor.
Your executor will now be obligated to track and report your pensions, adding a new level of responsibility
When you write your will, you’ll need to appoint an executor, or executors, to administer your estate after you’re gone. While you can name as many as you like, a maximum of four can operate at any one time.
Generally, it’s a good idea to appoint at least two. It can be very time-consuming to administer an estate, so appointing multiple people allows them to share the workload. It can also give you some peace of mind that if one of them passes away, or decides they don’t want the role, someone else is in line to take over.
If you die without a will, your estate will be managed by an administrator appointed by the court. Both administrators and executors are collectively known as “personal representatives”, and the new responsibilities will apply in both cases.
Including pensions in the new rules for estate valuations now means that the already time-consuming role of executor is set to have an added layer of complication.
Over a lifetime, it’s not unusual to accrue several different pensions. For example, if you changed jobs, spent time self-employed, or had a private pension alongside a workplace pension, then you could easily have acquired many small pots.
Under the new rules, it will be an executor’s responsibility to track down all pension information, including:
- Workplace pensions
- Personal pensions
- Frozen pensions from previous employment
- Private schemes and drawdown arrangements
Once the executor has found all the pensions, they must also obtain valuations, report these to HMRC, and calculate if IHT is due.
This could prove to be a time-consuming and complex task.
Here, your executor could find themselves in an arena in which they have very little knowledge. Pension valuations and reporting are a niche area and, unless they take on the role with some experience behind them, it could become stressful.
Delays could be much more likely given the time-consuming nature of pension administration
The inclusion of pensions could delay the probate process. Executors will need to submit requests to all pension providers and wait for each of them to respond with information about:
- Pension values
- Amounts payable to each beneficiary
- Details they need to calculate the IHT on each pension
Realistically, this is likely to be a drawn-out exercise, as some pension pots can be complicated to value, and HMRC will demand accuracy.
Your executor is also responsible for calculating and paying any IHT, generally using liquid assets from the estate. However, adding in pension pots is likely to create further challenges here.
IHT is usually due to be paid within six months of the deceased’s death. Otherwise, it can start to accrue interest and incur penalties.
However, the time required to gather all the necessary information from pension schemes could cause delays. Given that executors can be held personally liable for mistakes made during the administration of an estate, the additional complexity introduced by pension reporting may increase the risks they face.
To counter this, the government has introduced some payment options specifically for IHT due on pension death benefits. Similar arrangements may also be available for certain other assets that form part of an estate.
These are:
- Paying from the free estate, using non-pension estate assets. If the beneficiary isn’t part of the estate, they can be asked to reimburse the tax.
- Direct Payment Scheme (DPS). Pension scheme administrators pay the IHT directly to HMRC before releasing funds or other benefits. This needs to come by instruction from the beneficiary. Clients with an Intelligent Pensions-managed pension have access to this facility, which can help reduce the administrative burden on executors and beneficiaries.
- Beneficiary payments. The beneficiary can settle the IHT themselves, either from the pension or their own funds.
While it remains to be seen if these new rules will delay any probate proceedings, we do know that executors will be taking on a much bigger burden of responsibility.
Upfront estate planning can help to mitigate some of these challenges. Even if you’ve already worked with us on your later-life planning, a new approach may be more beneficial under the new pensions and IHT policy.
We suggest that, at the least, you:
Keep a record of your pension arrangements
Whether you have one pension or several, keeping a record of provider details and policy numbers can help your executors administer your estate more efficiently. This can be particularly valuable if you have accumulated pension benefits with multiple providers over your working life.
We have a handy document What I own and where I keep it, which you can download from our website, or you can ask your financial planner for a version with the adviser details already completed in the document.
Review your pension beneficiaries and update them if something changes
Make sure that it’s crystal clear who is due to receive which pension benefit. Remember, this needs to be done with your pension provider, rather than in your will.
If something changes – you go through a divorce, for example, and no longer want your ex-spouse to be named – you need to amend your beneficiary form with your pension provider as soon as possible.
Consider the impact of Income Tax
If you die after the age of 75, your beneficiaries could also be liable for Income Tax at their marginal rate on pension withdrawals. Along with IHT, this can sometimes lead to effective tax rates of 60% or more and makes your early pension and estate planning even more valuable.
Choose your executors carefully
When you’re choosing your executors, try to consider who will be best at taking on the responsibilities in line with the challenges we’ve outlined here. Think of people who are organised, trustworthy, and capable, and who will have the time to spare to administer your estate.
We’d also recommend choosing someone younger than you, so they’re more likely to be healthy and able to take on the role when the time comes.
It’s important to ask them first, before naming them in your will. You’re asking them to take on a lot of responsibility, and they need to understand what the role entails.
Executors can refuse the role, even if you’ve named them, but asking upfront is more likely to prevent this from happening.
Get in touch
The new rules surrounding pensions and IHT can be complicated, and the added pressure on executors only creates more challenges. We’re here to help you make sense of it all, enabling you to manage your estate planning in line with new legislation.
If you’d like to find out more, please email hello@intelligentpensions.com or call 0800 077 8807.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning or will writing.