With pensions set to be included within estates for Inheritance Tax (IHT) purposes from April 2027, having multiple pension pots may no longer be simply an administrative inconvenience, it could create significant complexity for families at an already difficult time.
Over the course of a working life, many individuals accumulate numerous pension arrangements. Changing employers, workplace auto-enrolment schemes, personal pensions, SIPPs and legacy arrangements can quickly build into a fragmented portfolio of retirement savings. The average UK adult is estimated to have around 12 jobs during their career. It is therefore unsurprising that pension sprawl has become commonplace.
At Blacktower Financial Management, we regularly meet clients who are unsure how many pensions they hold, where they are invested, or whether those arrangements remain aligned with their long-term objectives.
The upcoming legislative changes mean that reviewing and potentially consolidating pensions is becoming more important than ever.
The Growing Complexity of Pension Consolidation
Historically, pensions have been treated favourably for estate planning purposes. Unused pension funds typically sat outside the estate for IHT calculations, making them an effective vehicle for wealth preservation and intergenerational planning.
From April 2027, however, unused pension funds are expected to form part of an individual’s estate for IHT purposes. Draft legislation has outlined the proposed framework, and while further detail may evolve, the direction of travel is clear: pensions will no longer sit entirely outside estate calculations.
This introduces several layers of complexity.
Legal Personal Representatives Face Increased Responsibility
Following death, the Legal Personal Representatives (LPRs) whether executors or court-appointed administrators, will be responsible for reporting and settling IHT before distributing both pension and non-pension assets.
Where multiple pension schemes are involved, this process can become highly burdensome.
LPRs must:
- Identify all pension arrangements held by the deceased
- Request up-to-date valuations from each pension scheme administrator
- Determine whether benefits are payable to exempt beneficiaries (such as spouses, civil partners or charities)
- Calculate IHT liabilities accordingly
- Submit returns within strict deadlines
This requires not only access to accurate records, but also a working understanding of pension regulation and tax law, often under time pressure.
Administrative Burden and Time Constraints
IHT is generally payable within six months from the end of the month of death. Interest may be charged on late payments, currently at 8% per annum.
Where pensions are disorganised or difficult to trace, delays in obtaining valuations could create cashflow challenges or result in penalties and interest charges.
In estates involving several pension schemes, some of which may date back decades, record-keeping becomes critical. If documentation is incomplete, beneficiaries and LPRs may face protracted correspondence with multiple providers.
The more fragmented the pension landscape, the greater the potential strain on families.
The Impact on Beneficiaries
Further complexity arises when determining how pension death benefits interact with exempt beneficiaries.
If benefits pass to a spouse, civil partner or charity, they may qualify for exemption from IHT. If not, they may contribute to the taxable estate value.
The LPR must have clarity on beneficiary nominations, scheme rules and distribution options. Without this information, calculating the correct IHT liability becomes extremely difficult.
In certain cases, LPRs may direct pension scheme administrators to withhold up to 50% of a death benefit to cover potential IHT liabilities, penalties and interest. While this may protect against underpayment, it can delay beneficiaries receiving funds potentially causing hardship where income is required promptly.
For families relying on pension death benefits to support ongoing living costs, delays could have significant financial consequences.
Why Consolidation May Help
Consolidating pensions into a single, well-managed arrangement can materially reduce these risks.
By bringing multiple pots together, individuals may:
- Simplify estate administration
- Reduce the likelihood of missing or overlooked pensions
- Streamline valuation requests
- Clarify beneficiary nominations
- Align investment strategy
- Improve oversight and reporting
From an IHT perspective, a single consolidated scheme may significantly reduce administrative burden for LPRs.
While consolidation does not remove potential IHT liability under forthcoming rules, it can reduce the risk of delays, penalties and confusion.
Beyond Administration: Investment and Retirement Planning Benefits
Although the upcoming estate changes have sharpened the focus on consolidation, the benefits extend beyond inheritance planning.
Many legacy workplace pensions offer:
- Limited investment choice
- Higher charges
- Restricted retirement flexibility
- Outdated beneficiary nomination records
A consolidated pension arrangement may provide:
- Broader investment options
- Improved cost transparency
- Greater drawdown flexibility
- Enhanced reporting
- Clearer beneficiary structures
However, consolidation is not automatically appropriate in all cases. Some older pensions may include valuable guarantees, protected tax-free cash entitlements or safeguarded benefits. These must be assessed carefully before any transfer decision is made.
Professional advice is therefore essential.
A Holistic Wealth Planning Approach
At Blacktower, pension consolidation is never considered in isolation.
We assess:
- Overall retirement income objectives
- Interaction with other assets (ISAs, investment portfolios, property, offshore bonds)
- Potential future tax exposure
- IHT implications
- International residency considerations
- Cashflow modelling under different scenarios
For internationally mobile clients in particular, cross-border pension treatment adds another layer of complexity. Consolidation decisions must take account of current and future residency status.
Reducing Risk for the Next Generation
One of the most overlooked aspects of pension fragmentation is the burden it leaves for the next generation.
Executors already face significant administrative responsibilities when managing estates. Multiple pension providers, varied documentation and differing scheme rules can compound stress during a sensitive period.
Proactively organising retirement savings during one’s lifetime is not solely about personal benefit it is also about protecting beneficiaries from unnecessary complication and cost.
In an environment where interest charges on late IHT payments remain significant, disorganisation can quickly translate into financial loss.
Is Pension Consolidation Right for You?
You may wish to review your position if you:
- Have changed employers several times
- Hold multiple small pension pots
- Have not reviewed beneficiary nominations recently
- Are unsure of the total value of your pension savings
- Are approaching retirement
- Have concerns about future IHT exposure
A structured review can identify:
- Whether consolidation is suitable
- Whether valuable guarantees exist
- How your pensions align with retirement objectives
- Whether estate planning arrangements remain appropriate
Preparing for 2027 and Beyond
The inclusion of pensions within estates for IHT purposes marks a significant shift in UK wealth planning.
While legislation may continue to evolve, the direction is clear: greater scrutiny, greater reporting responsibility and potentially greater tax exposure.
Taking proactive steps now including reviewing and potentially consolidating pension arrangements, may reduce future risk and provide clarity for both you and your family.
Important Information
Pension transfers and consolidation are not suitable for everyone. Some schemes contain valuable guarantees or safeguarded benefits that may be lost on transfer. Tax treatment depends on individual circumstances and may change in the future. The value of investments can fall as well as rise and you may not get back the amount originally invested. Professional advice should be sought before making any decision. If you would like to review your pension arrangements and understand whether consolidation could support your retirement and estate planning objectives, speak with your Blacktower adviser
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
Blacktower Financial Management is authorised and regulated by the Financial Conduct Authority