Small pension pots can create big headaches for your executors. From April 2027, most unused pension pots and death benefits will be included in your estate value for inheritance tax. We explore how holding multiple pensions could affect your estate value, and what happens to small pensions when you die.
A common scenario: I have several small pension pots
One of the biggest problems when someone dies with multiple small pensions is the issue of executors not being able to finalise and distribute the estate.
Every pension must be identified and valued for inheritance tax (IHT) purposes and then matched to the right beneficiaries. Executors will have to report pension death benefits to HMRC and pay any IHT due before they can fully distribute the estate.
Before the pension rules changed, untouched defined contribution pensions were usually outside of someone’s estate for IHT. As a result, pensions became a popular tool for estate planning. People could spend their ISAs and cash, leaving their pensions to pass on to the next generation.
However, from 6 April 2027, most unused pension funds and pension scheme death benefits will be included in the value of your estate for IHT. One of the only exceptions is death-in-service benefits from registered schemes, which will remain outside of IHT.
Could my pension pots actually delay my estate being settled?
Holding several small pension pots can cause big delays and headaches for your executors. Even tiny old workplace pensions must still be tracked down, valued at the date of death, and checked in terms of the nominated beneficiaries.
Pension providers often have different processes and timescales for confirming values and paying out. This can drag out the probate process, even for small amounts. If there are missing or outdated ‘expression of wish’ or beneficiary forms, this can trigger extra checks, legal queries and even disputes.
Key pension benefits before 75
The age of 75 is a natural review point. After 75, the tax treatment on death changes, and the 2027 IHT rules may apply for anyone with unused pensions.
If you die before you reach 75 and before April 2027, many defined contribution pensions can pass tax-free to beneficiaries. However, after the age of 75, your beneficiaries will have to pay income tax at their marginal rate on what they receive.
If you haven’t taken your pension commencement lump sum (PCLS) by the time you crystallise, you may lose the opportunity to take it later. PCLS is often called the ‘25% tax-free cash sum’. As each scheme has its own rules, there may also be varying deadlines.
Key planning questions before 75
Below are some key planning questions to address before you reach the age of 75:
- Do you have multiple small, deferred pensions you could consider consolidating to simplify your estate administration and decision‑making?
- Would it be better to use some of your pension funds for your own retirement, spending today, rather than leaving savings at risk of IHT?
- Is your PCLS still available, and does it make sense to take it (or part of it) before you reach 75?
The above questions will depend on your income needs and tax position. Never move or consolidate a pension without getting professional financial advice. Carry out careful cash-flow planning to see if it’s beneficial to use your PLCS or to start spending your pension funds. For expert guidance on your financial planning, speak to our financial planners.
Financial planning for inheritance
When it comes to inheritance tax planning, there are certain things you could consider which could help to avoid delays for your executors.
- Make a clear list of every pension. Log the provider, policy number, and the type of pension, e.g. whether it’s a defined benefit or defined contribution scheme.
- Check and update beneficiaries and expression of wish forms – for each pension so the scheme’s trustees can pay out quickly and to the right people.
- Discuss the 2027 IHT changes with your financial planner – to ensure your will, pensions and overall estate plan still work from a tax perspective.
- Consider consolidating small pots where appropriate. This could reduce the number of providers your executors must deal with. However, always get professional advice before consolidating your pensions.
Pension Advice, West Bridgford
If you want to protect your family wealth, it’s important to understand how multiple, small pensions could affect your estate value. Without a robust strategy in place, the future could be left uncertain, and your family may end up paying a high amount of inheritance tax (IHT). A financial plan that covers your pensions will enable you to plan ahead for your family.
At Balance: Wealth Planning, we can review different types of pensions to help you make an informed decision over your savings. Our financial planners will explain how death benefits work and how your pensions could be taxed. We will give you clarity on your inheritance tax liability, so you can create a sensible financial plan to protect your legacy.
Get in touch to book your pension review with our financial planning team.
https://kennethmorris.co.uk/2025/12/16/unused-pension-funds-and-death-benefits/
https://www.aviva.co.uk/retirement/pension-basics/what-happens-to-your-pension-when-you-die/
https://www.standardlife.co.uk/pensions/guides/what-happens-pension-die
