Your Pension could face double taxation from April 2027
What can you do to minimise the impact?
For years, a pension has been one of the most tax-efficient ways to pass money on to loved ones. Left untouched a pension pot usually escaped inheritance tax entirely, passing to your family outside your estate. New rules mean that’s about to change.
From 6 April 2027, most unused pension funds and death benefits will count as part of your estate for inheritance tax. If your plans were built around passing your pension on untouched, they will need to be reviewed ahead of next April.
What this change will mean for you and the additional impact of double taxation
If you die after the age of 75, the pension your beneficiaries inherit will also be taxed as their income when they draw on it. Stack that on top of the inheritance tax payable at 40%, and the combined effective rate can reach 64% to 67% for beneficiaries, depending on their income tax rate. In other words, two-thirds of that money could go to the taxman rather than to your loved ones.
What hasn’t changed
It isn’t all bad news. Several things will stay exactly as they are. Anything you leave to a spouse or civil partner remains exempt. Gifts to charity are still free of inheritance tax. Death-in-service benefits stay outside the net. And if you die before 75, your beneficiaries still inherit free of IHT. It’s the pension money you leave to children and other beneficiaries after age 75 that’ll be taxed twice.
Retired or still building?
Planning ahead now means that more of your pension will reach your family with less lost to tax. The most beneficial courses of action will depend on your stage of life and personal circumstances.
For example, if you’re already retired or approaching retirement, you may need to rethink the order in which you spend your money. For years the standard advice was to leave the pension until last, because it passed on free of inheritance tax. That logic now reverses. For many people, drawing on their pension earlier to reduce the pot value liable to IHT, and spending other assets later, will be an appropriate course of action.
In contrast, for younger high earners, still building wealth, a different approach may be considered. Yes, pension contributions will remain valuable for the income tax relief on contributions, but should every spare pound go into a pension, or would a more balanced mix give you greater flexibility later?
5 questions to ask your adviser
Everyone’s circumstances are different, so the best approach will be tailored to yours. An experienced Financial Adviser can look at your whole position and help you make the right call. The questions that matter most are these:
- What is my IHT position once my pension is included?
- What will be the taxation impact for my beneficiaries from 6th April 2027?
- Which assets should I draw on first to reduce future taxes?
- Could gifting, trusts, alternative investments or simply taking more from my pension now help?
- Should I take my tax-free cash lump sum earlier than I’d planned?
Why reviews matter
Your life moves. The rules move. Markets move. A plan written three years ago and left alone won’t keep pace with any of that. An annual review, with extra conversations when something changes, is how a plan stays relevant and meaningful. A marriage, a grandchild, a business sale, a house move, a health scare, a change in the tax code. Each is a reason to sit down and look again.
How we can help
We’ve been planning wealth management and investment strategies for over 30 years. We provide independent advice, have a track record of outperformance against sector benchmarks, and build plans around people rather than products. When the news gets loud, we offer a calm voice.
Get in touch
At Best Advice Wealth Management, we provide expert, bespoke independent Pensions, Estate Planning and IHT advice. We have access to a range of tools to illustrate your own position, potential future taxes and we can offer strategic solutions to preserve your wealth for now and for the next generations.
There’s time to plan ahead of April 2027, and it’s a window worth using well. We invite you to get in touch to get clarity on your own situation and the most suitable options available to you.