Pensions Bulletin 2026/10

Government proposes numerous changes to new IHT on pensions law 

Ahead of Report stage on the Finance Bill that was introduced to Parliament in December 2025, a number of Government amendments have been published, some of which are relevant to pension provision. Amongst these are 32 amendments to the clauses that bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes in relation to deaths on or after 6 April 2027 (see Pensions Bulletin 2025/50).

In this article we highlight those amendments of most note. Separately, HMRC has said that these amendments do not introduce a change to the policy but are intended to ensure the legislation works as intended and that it will publish “further clarifications on the process” this spring. 

Amongst the amendments: 

• “Notional pension property” is cross referenced to the existing IHT rules about excluded property, for which purpose the pension property is regarded as situated in the country or territory in which the scheme is established. This will mean that foreign pensions are excluded from the new charge to IHT where the deceased was, on death, not a long-term UK resident. 
• The “active member of the scheme” limitation in the exclusion of death benefits for those in employment, is removed. This should mean that death in service benefits will now also be excluded from the IHT charge where they are provided for life cover only members of a registered pension scheme or to members who continue to be employed although no longer accruing benefits in the pension scheme. This change will be most welcome, particularly given that death in service benefits are intended to protect an individual’s family in the event of their untimely death. 
• A new category of “exempt benefit”, within a pension scheme context, is created, which picks up all the usual transfers of value from the estate made on death that are not subject to IHT – ie to spouses or civil partners and for various gifts to charities, political parties etc. So, for example, a lump sum death benefit paid to an animal charity at the deceased’s request should not now potentially generate an IHT charge.
• The ability to issue and to withdraw withholding notices to the pension scheme administrator is extended to those who expect to be, but have not yet become, the deceased’s personal representative. This is to reflect delays that may arise in such an appointment, such as where the deceased has not left a will. 
• A new provision operates where IHT applies and multiple lump sum death benefits are paid so that the person by whom the IHT is paid does not affect the way in which the deceased’s available lump sum and death benefit allowance (for income tax purposes) is apportioned between the different lump sum death benefits. 
• Another new provision relates to the interaction of the new IHT with the pre-existing special lump sum death benefits charge under section 206 of the Finance Act 2004. A new section 206A is added to ensure that the special lump sum death benefits charge is not paid on that part of the lump sum death benefit that is used to pay IHT. A new section 206B ensures that the special lump sum death benefits charge is not reduced where an error is made and later corrected in calculating the IHT liability. 

There are also many detailed technical adjustments to how the proposed law operates for the following: 

• Deduction of income tax where the beneficiary has paid IHT in respect of the deceased’s pension rights. 
• Where the pension scheme administrator has paid IHT in place of a beneficiary (and would have reduced their benefits accordingly) and HMRC returns some of that IHT to the beneficiary due to it being an overpayment. Amongst other things, this proposed law is now to apply in all cases where there has been an overpayment.  

Lifetime allowance abolition – Government takes further regulation-making powers 

Another Government amendment to the Finance Bill, to be debated at Report stage, relates to an existing power in the Finance Act 2024 that enables regulations to make changes to primary legislation in connection with the abolition of the lifetime allowance. This power has been used on three occasions as technical errors and omissions have been discovered in the complex law that delivered the abolition and its replacement with lump sum allowances. 

The Government proposes that the power is extended in a number of ways, including so that it can be used to make transitional, transitory or saving provisions and so that regulations made using this power can take effect for the 2024/25 tax year onward. The date on which the power expires is also to be put back from an imminent 5 April 2026 to 30 June 2026.

Government to move more amendments to the Pension Schemes Bill 

Ahead of the Lords’ Report stage on the Pension Schemes Bill, which is scheduled to start on 16 March 2026, numerous amendments are building up on the Amendment Paper, a number of which are from the Government. The Government amendments include the following: 

Guidance on Investment principles and choosing investments 

A new clause enables the promised (see Pensions Bulletin 2025/50) statutory guidance on certain investment matters to be delivered. It requires the Secretary of State to issue guidance explaining aspects of the legal requirements for statements of investment principles and the choosing of investments by trustees which could include the meaning of “financially material considerations” (including “environmental, social and governance considerations”) and “best interests of members”.  

The first guidance must be issued within 12 months of this part of the Bill coming into force (which separately is to be two months after Royal Assent). The clause specifies that trustees and fund managers to whom discretion has been delegated must have regard to the guidance. 

AWE Pension Scheme 

A new Chapter 2A, comprising nine clauses, is added to Part 4 of the Bill and relates to the establishment of a new public sector pension scheme into which the current AWE pension scheme is to be transferred whilst preserving existing rights of scheme members. 

Although this was tabled for Committee stage (see Pensions Bulletin 2026/01), it appears that it was not accepted into the Bill at this point. 

Other matters 

Other Government amendments include the following: 

• Expanding the default pension benefit solution requirement for DC schemes so that it is available to deferred members as well as active and pensioner members. 
• Further modifying the new pre-1997 indexation requirement for PPF and FAS compensation to make clear how these requirements apply where pension scheme rules required pre-1997 indexation only for the purposes of removing GMP inequalities.
• Enabling the Pensions Regulator to issue a Code of Practice in relation to the scale and asset allocation requirements for certain DC schemes.

TPR projects the evolution of DB schemes over the next decade

The Pensions Regulator has published a new analysis on how it expects the universe of occupational defined benefit schemes may evolve in the decade between 2025 and 2035. This comes at a time when surplus extraction is being enabled by the Pension Schemes Bill, as well as the increased surplus levels held in DB schemes, with 52% of schemes having a buy-out surplus and total surplus assets on this basis at £92 billion as at 31 March 2025.

TPR estimates that 75% of schemes will be able to buy out over the next decade without recourse to requiring additional employer contributions, equivalent to over 3,400 schemes. Of these, TPR projects that around 2,400 to 2,600 schemes may participate in insurance transactions, transferring around £200 billion to £400 billion of assets to the insurance sector. However, the vast majority of the schemes expected to transfer are “small” schemes with assets under management (AUM) of less than £100 million. The majority of transactions are expected to be undertaken over the first half of this period, with insurance companies absorbing around 300 small schemes every year.

TPR further expects that a meaningful superfund market can exist alongside the buy-out market, and the development of such a market does not affect the buy-out market as there are excess number of schemes who are sufficiently funded and thus do not meet conditions to transfer to superfunds. TPR estimates that there could be 350 schemes transferring into the superfund market in the next decade.

There is likely to continue to be a financially significant DB sector, with AUM in 2035 estimated to be around £0.6 trillion to £0.7 trillion in real terms. Half of the large schemes are considering running on in the short to medium term to access the surplus on an ongoing basis, with a range of views regarding the funding level at which surplus will be extracted and how surplus assets may be shared between savers and employers. 

The level of gilt holdings that underpin the DB liabilities may reduce by 35% to 45% from around £570 billion to between £320 billion and £380 billion (in real terms), mostly as a consequence of buy-out and insurance companies holding fewer assets in gilts compared to schemes running on.

TPR expects this analysis will help trustees to understand the options and plan to determine the future of their schemes over the next decade. It also expects to include an analysis of occupational defined contribution schemes alongside this DB scheme publication to provide a broader and more complete picture in the future. 

TPR warns “smaller” schemes to get ready for guided retirement duty 

The Pensions Regulator has stated that 86% of the largest pension schemes are offering their members at least one retirement income option whereas just 46% of small schemes offer members any decumulation product, and two fifths of all schemes offer members none at all. For this purpose, TPR has defined “large” as having at least 5,000 members and “small” as having 12 to 99 members. The analysis also shows that 43% of all members can access drawdown without leaving their schemes, with 16% of schemes offering this option.  

TPR has issued this analysis in light of the forthcoming guided retirement duty under the Pension Schemes Bill and is urging trustees to get ready for this requirement. 

DWP and TPR talk more about transition pathways and credible growth plans for DC scale and consolidation

The Department for Work and Pensions and the Pensions Regulator have issued co-ordinated papers setting out their policy principles and expectations for master trusts and other multi-employer DC schemes ahead of the introduction of the requirement to operate a main scale default arrangement holding at least £25bn in assets from 2030 to qualify as an auto-enrolment vehicle (see Pensions Bulletin 2025/23).

The DWP paper is quite short and focuses on the requirements in the Pension Schemes Bill for: 

• The transition pathway – giving existing smaller schemes more time to reach the full, scale requirement.
• The new entrant pathway – enabling new schemes to enter the market and grow to scale while offering a genuinely innovative proposition.

TPR’s press release and statement sets out how it believes trustees of master trusts can assess their scheme’s growth potential and prepare for the proposed new scale requirements. TPR acknowledges that the announcement of the new scale requirements has already had a significant impact on the commercial DC master trust market, with corporate activity increasing as a result. The behaviour of market participants such as employers and employee benefit consultants has also been affected, with perceived risks around scale informing employer selection and deselection of master trusts. 

As a result, TPR is urging caution to any advisers and employers second guessing which master trusts not yet at scale will be unable to meet scale within the timescales, and says that employers and advisers should approach selecting a pension scheme in this period of transition focused squarely on saver outcomes. 

TPR then goes on to state how trustees of master trusts should be preparing for the scale requirements and the principles it will be looking for to decide if a growth plan is credible (as will likely be required for under both pathways). 

FCA sets out its pensions regulatory priorities as the VFM consultation closes 

The Financial Conduct Authority has published its first Pensions Regulatory Priorities report. Of particular interest is what the FCA says it will do this year, which includes: 

• Finalising the VFM framework rules (subject to legislation and feedback), to give firms time to implement system changes before the 2028 launch.  
• Supporting the development of the framework proposed in the Pension Schemes Bill for member transfers through contractual override and assessment against scale test. 
• Continuing work on the Advice Guidance Boundary Review and supporting firms that want to provide targeted support. 
• Publishing a discussion paper on retirement journeys, including the FCA’s approach to guided retirement in workplace contract-based pensions, subject to Parliamentary approval of the Pension Schemes Bill.  
• Consulting on the pension charge cap and performance fees, with the aim of facilitating access to a broader range of asset classes while maintaining an appropriate degree of consumer protection. 

The FCA has introduced Regulatory Priorities reports across nine sectors, including pensions, and these will replace its portfolio letters. The new reports are intended to help firms understand what FCA expects and what to focus on. 

The FCA’s announcement about finalising the VFM framework rules this year comes just after the consultation on that topic closed (see Pensions Bulletin 2026/02). LCP responded to the consultation and, amongst other points we said that: 

• The scope of the Framework should be extended to include decumulation products and non-workplace pensions. 
• There is still a risk of “gaming” over the use of forward-looking metrics and so we suggest greater oversight from the regulator or ability for public scrutiny is considered.  
• A four-point Red, Amber, Light Green, Dark Green (“RAGG”) structure is a step forward, but the current design creates material risks unless the framework is tightened, the use of overrides is properly governed, and the regulatory consequences of each rating are reconsidered. 
• Insufficient recognition is given to employer-level subsidies and support. Employer support should not be relegated to the narrative part of the process alone. Without meaningful acknowledgment of employers who go further in supporting provision, there is a real risk that businesses will be discouraged from offering anything beyond the bare minimum. 
• Given the significant consequences of the RAGG rating system, a trial period before full implementation would seem sensible. 

Nest consults on rule changes to allow flexi-access drawdown 

Nest has launched a consultation on proposed changes to its scheme rules that will enable it to offer the full range of retirement options and death benefits that other DC pension schemes are able to provide. 

Amendments to the Nest Order, which provide a specific power for Nest to offer flexi-access drawdown, and other relevant options, as benefits to its members, have been laid before Parliament in draft form. The consultation sets out the corresponding proposed changes to the Nest Rules. 

The changes to the Nest Rules include proposals to: 

• Introduce a new drawdown account alongside the existing pension account, setting out how funds can be designated to drawdown and how income can be taken, with detailed terms determined by the Trustee from time to time. 
• Update the rules on benefit age to clarify that they do not apply to funds held in a drawdown account. 
• Add provisions for new retirement and death benefit options – including scheme pensions and drawdown for dependants, nominees or successors. 
• Amend the transfer out rules to allow drawdown accounts to be transferred and to permit partial and separate transfers of pension and drawdown accounts, subject to legislation and tax rules. 

Currently, Nest members can only withdraw regular amounts from the scheme in retirement through the uncrystallised funds pension lump sum mechanism. Nest says that its members, who are low to median earners, may need access to tax-free cash early in retirement to pay for essential needs, like home repairs, or to support them with other costs like paying down debt. 

The consultation runs until 29 April 2026. 

Flaw in pensions salary sacrifice legislation addressed for now

The House of Lords passed an amendment to the National Insurance Contributions (Employer Pensions Contributions) Bill at Report stage on 5 March 2026 so that those repaying student loans will not face extra loan repayments as well as extra NICs on any pensions salary sacrifice above the proposed £2,000 pa cap.

The Bill, which was introduced to Parliament in December 2025 (see Pensions Bulletin 2025/50), was seemingly flawed on this point because it failed to recognise that student loan repayments use the same definition of earnings as is used for NICs. So, by adding back to earnings pensions salary sacrifice above the £2,000 pa cap for NIC purposes, this also had the effect of adding back to earnings such an excess for student loan payments. As a result, an affected individual who might have to pay an extra 2% NICs on such earnings might also have to pay an extra 9% student loan repayment on the same earnings.

Understanding pension status categories on the dashboard

The Pensions Dashboards Programme (PDP) has published a blog outlining the three pension status categories that will appear on the dashboard and how understanding these will help industry to better support users in navigating their pension information when the dashboard becomes publicly available.

The three categories are:

• Confirmed pensions: where a successful match has been made and the pension provider or scheme is able to supply all the required data immediately. These pensions will appear as complete and ready for the user to view. 
• Pending pensions: where a successful match has been made, but not all the required pension information can be displayed yet. The user does not need to do anything except check back again in a few days as the required data must be returned within set time limits (see Pensions Bulletin 2026/04).
• Pensions that need action: where either a possible match has been made and additional information is needed for verification or where there has been a match, but the user is likely to need to contact the provider or scheme before it provides the information and the pension can move into either the “confirmed” or “pending” category.

Government launches new unit to disrupt fraud 

The Government has announced that from April 2026 a new Online Crime Centre will bring together specialists from the government, police, intelligence agencies, banks, mobile networks and major tech firms to drive co-ordinated action against fraud. So this new unit is not just fighting against pension scams but is part of a new fraud strategy intended to tackle scams across all areas of society. The Pensions Regulator, speaking as leader of the Pension Scams Action Group, noted that it works closely with law enforcement, government, the pensions industry and other partners against fraud and welcomed the new strategy. 

Actuaries update mortality model 

The Continuous Mortality Investigation (CMI) of the Institute and Faculty of Actuaries has released CMI_2025 (Working Paper 211), the latest version of its mortality projections model. 

After significant changes last year (see LCP partner Ben Rees’ 2025 blog), there are no changes to the modelling this year, so is a “business-as-usual” release. 

The calibration of the model reflects the mortality experience of England and Wales over 2025. Mortality rates over 2025 were the lowest on record (2% below 2024), and reflecting this data leads to life expectancies at age 65 for the core model being around 0.6% higher than if using CMI_2024. Although mortality in 2025 reached record lows at pensioner ages, mortality for working age males remained above the 2015-2019 average. 

Looking forwards to next year, the CMI has said that it is reviewing various elements of the projection methods, including the convergence periods at the oldest ages.