Q&A: Will my NHS Pension by subject to IHT?

Alec Collie, Head of Medical at Wesleyan, the specialist financial mutual for doctors.

Recently, we’ve been getting many questions over what the government’s plans to make pensions subject to inheritance tax (IHT) will mean for NHS Pension Scheme (NHSPS) benefits.

The good news is that in most cases, there will be no change. But that doesn’t mean that medics and NHS staff won’t be affected in other ways – nor that IHT isn’t something that they need to think about:

Q: What changes are the government proposing?

At the 2024 Autumn Budget, the government unveiled plans to make unused pension funds and death benefits potentially subject to IHT from April 2027. This would involve including them in the value of a person’s estate when determining IHT liability, where previously they were excluded for IHT purposes.

This proposal marks a significant departure from the current rules, where, if an estate is left to someone who is not a spouse or civil partner, benefits from a registered pension scheme are typically excluded from IHT calculations.

Q: Will this change affect me as an NHS Pension Scheme member?

In most cases, no. What is, and isn’t, liable for IHT and what isn’t when it comes to NHSPS benefits isn’t going to change under the new rules, because the changes are focused on defined contribution (DC) pension schemes, not defined benefit (DB) schemes like the NHSPS.

Unlike a DC pension, members of DB schemes don’t have ‘unused’ funds that they can pass on after they die – although there are other benefits in the NHSPS that can be passed on to loved ones.

If you die in service, the scheme has a two times death in service benefit that will be paid to your spouse, registered civil partner or nominated other party if you die within five years of retirement. This is already excluded from your estate for IHT purposes if it’s given to your spouse or civil partner and included if it’s given to anyone else. There will be no change to this under the government’s plans.

Similarly, the ‘survivor pension’ is payable to your spouse, registered civil partner or nominated partner, and a child allowance for children that are financially dependent on you at the time of your death. These are currently, and will remain, excluded from IHT.

If you’re single, bear in mind that you need to tell the NHSPS who you want your death benefit and / or survivor pension to be paid to.

If you’re married or have a civil partner, they will automatically qualify for the death in service and survivor pension. But if you want someone else, or an institution, to receive the lump sum, you’ll have to nominate them manually using the NHS forms here. Remember to keep this updated too – we find a lot of medics first fill this out at med school and put their parents as their beneficiaries, which might not still be your wishes.

Q: Are there any exceptions?

Yes – to any pension ‘top up’ payments you are making, specifically into the MPAVS scheme

This is an option within the NHSPS that allows you to make additional pension contributions and build up a separate retirement fund. These additional contributions are invested and used to supplement your main scheme benefits at a later date.

MPAVS funds are going to be subject to the new rules and will be counted as part of your estate However, as the name implies, this is a voluntary thing that members can choose to sign-up to – the vast majority of medics and NHS staff won’t have any MPAVS contributions, so won’t need to be concerned about this.
Similarly, your pension commencement lump sum (PCLS) will continue to be liable to IHT, as it is now. Members of the reformed (post-2015) NHSPS can choose the level of PCLS vs. pension they receive – and this will be an important decision point to factor into both retirement and estate planning.

Q: Should I still be planning around IHT?

Absolutely.

Some NHS staff will also have personal pensions, including ‘self-invested personal pensions’ (SIPPs), and these will be included in the new rules.
If you have a personal pension, you might now need to re-consider how you plan to use these funds – especially if you’d planned to pass the money to a loved one, under the assumption it wouldn’t form part of your estate.

More generally, estate planning should be included in any thorough financial plan.

It’s not just pensions that contribute to the value of your estate – the value of your property, and other assets such as investments and savings can all contribute too.

The amount of tax revenue that IHT is generating continues to rise as more and more estates are pulled into the tax net – a result of rising values in assets such as houses meeting IHT thresholds that have been frozen until 2030. This makes it even more important that you understand the potential tax implications of what you want to happen to your money after you pass away, so there are no surprises for your loved ones and so that your plans can proceed as you intended.

The good news is that there are several allowances, exemptions and various financial planning strategies that you can adopt to manage your IHT exposure.

IHT rules can, however, be incredibly complex. If you’re at all unsure about how they might apply to you, or what your liability could be, speak to a financial adviser. They can help you assess your potential exposure and help develop a tax strategy to support your aims. This might involve steps like gifting money to your loved ones while you’re still alive or putting assets into trust. You can also consider gifting, or increasing current donations, to charity – this won’t only reduce your estate by the gift amount but reduce the tax rate you could pay if you meet certain conditions.

For more information on IHT planning, and to speak to a financial adviser specialising in advising NHS staff and on the IHT implications of the NHSPS, visit our online IHT hub here.