Can I nonetheless depart my pension to my daughter underneath new inheritance tax guidelines? STEVE WEBB replies

My husband and I have made mirror wills, leaving everything to each other. However, I have a private pension which I haven’t taken yet, and on this I nominated my daughter as the beneficiary.

When the law changes next year and pensions are included in the estate, will the pension provider honour my wishes or will they follow the will?

Also, if I die before my husband and still haven’t touched my pension, will my daughter get this and how does this work as far as inheritance tax is concerned?

On another point, I must agree with you on your concerns for executors trying to sort out pensions as part of an estate.

I previously dealt with a family member’s estate and the pension company would not give any details until after the inquest.

The inquest date was seven months after the death. If this happens next year this will hold up probate, causing extra costs and stress.

Steve Webb replies: When the rules around pensions and inheritance tax change in April 2027, this will affect the tax treatment of unspent pensions, but should not change the way that pension schemes decide who should get the money after your death.

Starting with your private pension, it is good that you have completed an ‘expression of wishes’ form to say who you would like to receive any unspent pension balance after your death.

Ideally everyone should do this for every pension that they have. They should also keep such forms updated, especially if they have had a change of family circumstances such as a divorce.

Having a clear and up-to-date statement of who you want to get the money will make life much easier and speed up the payout after your death.

You will notice however that it is called an ‘expression of wishes’ form rather than an ‘instruction’. This is because it is the trustees of the pension scheme who have the final say on where the money goes.

In most cases, the trustees are likely to honour your request and pay the money to your daughter. But some cases are more controversial.

For example, what happens if someone originally nominated a first wife or husband and then remarries but hasn’t updated the form?

The trustees will need to decide whether to pay out to the first wife/husband or the second one (or perhaps split the payment between the two).

People are often surprised that it is not the will that decides where the pension money goes. But decisions around where the pension goes are separate to the will.

A trustee might ask to see the will, to guide them in their decision making – especially in more difficult or complex cases.

But if the expression of wishes form is up to date and seems clear and uncontentious, then the fact that your will leaves everything else to your husband should not over-ride your wishes for the pension.

In terms of inheritance tax, as you probably appreciate, transfers between spouses are free of IHT.

This means that whichever of you and your husband dies first, your estate will transfer to the other and there will be no IHT on these amounts at that point.

When the second of you dies, the value of the remaining estate will then be tested for IHT.

But if you die before your husband and have an unspent pension pot, to be left to your daughter, this is potentially subject to IHT, post April 2027.

However, you have a £325,000 IHT allowance, plus an extra £175,000 allowance if your estate includes your family home and is left to direct descendants.

So, if the only bequest that doesn’t go to your husband is your pension pot, it’s unlikely that there would be an IHT bill at that point.

What the nomination to your daughter will do is use up part of your IHT allowance leaving less unused allowance to be passed on to your husband.

To give a simple example, let us suppose that you have £100,000 in your pension pot and this is passed to your daughter.

This will use up £100,000 of your IHT allowance and leave £225,000 of unused allowance to be passed on to your husband.

When he dies, he will have his own £325,000 plus your £225,000, making £550,000 in total that will be exempt from IHT (plus any extra allowances from both of you in respect of the family home).

In terms of your final observation, you make a very important point about how long all of this can take.

This is especially important given that fines and penalties can apply if the IHT bill is not settled within six months of the death.

All of these new rules will slow down the process of sorting things out after a loved one has died and will delay the point at which you can apply for probate.

This means that in practice it could easily be a year or more after someone dies before all of their financial affairs have been fully tied up.

I cannot help feeling that once people start to experience the system in action in 2027 there will be an outcry about how difficult things are for bereaved families, and I hope that the rules and deadlines will then be relaxed.