Much of the commentary on the Finance Act 2026 pension changes focuses on defined contribution schemes. Defined benefit — or final salary — scheme members face a different set of questions, and the impact of the new rules on their position is less straightforward.
How defined benefit pensions work at death
Defined benefit schemes pay a guaranteed income in retirement based on salary and years of service rather than a fund value. On death, the benefits available depend on the scheme rules and the stage at which the member dies:
Dying before retirement (in service): most DB schemes pay a lump sum death benefit — typically a multiple of salary — and may also provide a dependant's pension to a surviving spouse or civil partner.
Dying after retirement (in payment): most DB schemes pay a reduced or continuation pension to a surviving spouse or dependant. Some schemes also have a guarantee period during which payments continue to a nominated beneficiary even if the member dies shortly after retirement.
Some schemes also allow a commutation lump sum at retirement, which converts part of the pension income into a one-off payment.
What the Finance Act 2026 changes for DB members
The Finance Act 2026 and Pension Schemes Act 2026 bring most pension death benefits within the estate for IHT. For defined benefit scheme members, this affects:
Lump sum death-in-service benefits: these are typically paid by the pension scheme trustees to nominated beneficiaries. From April 2027, where these form part of the estate, IHT will apply.
Guarantee period lump sums: where a DB scheme has a guarantee period and the member dies within it, any remaining payments may be commuted into a lump sum. These lump sums will also be reviewed under the new framework.
The dependant's pension: a pension paid to a surviving spouse or dependant is generally not a lump sum and is treated differently. The income stream itself is not subject to IHT in the same way as a fund value — it is taxable income in the hands of the recipient. The detail of how each benefit type is treated depends on specific scheme rules.
Expression of wishes nominations for DB members
Defined benefit scheme members should review their expression of wishes nominations with as much urgency as defined contribution holders. The trustees of the scheme have discretion over to whom they pay death benefits, and while nominations are not legally binding, they carry significant weight. Under the post-2027 rules, the choice of beneficiary can affect the IHT treatment of the death benefits paid.
Seeking scheme-specific advice
The impact of the April 2027 changes on defined benefit scheme members varies significantly by scheme. Members should obtain the scheme booklet or request a death benefits summary from the scheme administrator, and then take that information to a regulated financial adviser who can assess the implications for the overall estate plan.