CDC and inheritance tax: a new perspective on member value

For years, a key feature of defined contribution (DC) pensions was the ability to pass unspent pension pots down to younger generations without any inheritance tax. But from April 2027, this is expected to change. Most unused pension funds and lump sum pension death benefits to be brought into an individual’s estate for inheritance tax purposes.

For high net worth individuals, the value passed on could be materially lower than under today’s rules. As a result, some members may place greater value on spending their DC pot during retirement, increasing the appeal of products that could deliver an income for life like annuities or collective defined contribution (CDC) schemes. The pros and cons of an annuity have been well explored so here we'll focus on CDC.

Death benefits under CDC 

Any CDC lump sum death benefits would similarly fall within the inheritance tax regime.

However, most CDC schemes are unlikely to offer material lump sum death benefits. This reflects a defining feature of CDC: longevity pooling, which helps the scheme provide higher average retirement incomes. 

Some CDC schemes may choose to provide ongoing spouses’/dependants’ pensions, either as a standard feature or an option within the scheme design. Where provided, dependants’ pensions are expected to remain outside the scope of the inheritance tax changes.

This creates an important difference:

• A DC drawdown member could leave behind a pot of capital that may be subject to inheritance tax; whereas 
• A CDC member may leave a continuing pension to a surviving spouse or partner outside the inheritance tax regime.

The importance of this distinction will vary between members. Those with significant assets outside their pension may continue to prioritise passing wealth to future generations. Others may place a greater value on ensuring a spouse or partner receives a secure income throughout retirement.

Many individuals’ estates will remain under the inheritance tax threshold, but even for low to moderate earners pension pots can be a significant asset. 

Rethinking the retirement legacy 

The April 2027 inheritance tax changes could reshape how members think about retirement and legacy planning. If the objective is to pass wealth to future generations, DC drawdown may still be attractive despite the new tax regime. It has more flexibility over who the money goes to and how it is used. But if the priority is ensuring a spouse or dependant receives a secure lifetime income, CDC’s inheritance tax-efficient dependant pensions may be more appealing. As a result, inheritance tax may become another reason why CDC is considered a good vehicle for delivering pensions to members and their dependants.

If you’d like to read more about the other potential benefits from CDC, please visit our CDC Hub, or get in touch.

Scope for further political changes

This article reflects our understanding of the proposed inheritance tax changes as of August 2026. Future legislation and government policy may affect the position described above.

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.