You could lose 64% of your pension to tax after April 2027. It sounds shocking, but for many UK retirees and pension beneficiaries, this could soon be a reality under upcoming inheritance tax (IHT) changes.
In this post, we explain what is changing, who is affected, and how IHT planning, estate planning, and pension advice can help you protect your legacy.
What Is Double Taxation of Pensions?
Double taxation occurs when the same pension funds are taxed twice. First through Inheritance Tax (IHT) when you pass away, and then again through Income Tax when your beneficiaries withdraw the funds.
Currently, UK pension rules allow many people to pass their pensions to loved ones with little or no tax, depending on their age at death. However, from April 2027, this landscape will change dramatically.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial advice. Please seek professional advice before making any decisions regarding your pension or estate.
The Current Rules for Inherited Pensions
Before Age 75
- If you die before 75, your pension can usually be passed to beneficiaries tax-free.
- No Income Tax or Inheritance Tax is due on the pension itself.
After Age 75
- If you die after 75, beneficiaries pay Income Tax on withdrawals, but no IHT is applied to the pension fund.
- This has made pensions a popular way to preserve wealth and reduce IHT liability.
However, this advantage will soon change.
What Is Changing to Pensions in April 2027?
Starting 6 April 2027, unused defined contribution (DC) pensions will become subject to Inheritance Tax.
That means any remaining pension pot will be counted as part of your estate, potentially attracting the 40% IHT charge once your total estate exceeds the available nil-rate bands.
Check Your Inheritance Tax Liability from April 2027 Here (Free Inheritance Tax Liability Calculator)
The government’s rationale is that pensions should be used for retirement income, not as an IHT shelter. Analysts expect these changes to draw tens of thousands of additional estates into the IHT net every year.
Tax treatment varies according to individual circumstances and is subject to change.
How Pension Double Taxation Works
Here is the worrying part. This is not just one tax.
Step 1: Inheritance Tax (40%)
If your estate, including your pension, exceeds the IHT threshold, the pension can face a 40% deduction on death.
Step 2: Income Tax on Withdrawals
When your beneficiaries later draw money from the inherited pension, they will pay Income Tax at their marginal rate (20%, 40%, or 45%).
Example:
- £1,000,000 pension
- 40% IHT = £400,000 tax
- £600,000 remains
- 40% Income Tax on withdrawals = £240,000 tax
- Total tax = £640,000 (64%)
That is nearly two-thirds of your pension lost to tax.
Could Your Pension Really Reach 90% Tax?
Shockingly, yes, in extreme cases.
For estates exceeding £2 million, the Residence Nil Rate Band (RNRB), worth £175,000 per person, starts to taper off.
This tapering means high-value estates can lose this additional allowance, exposing more to IHT.
Combined with Income Tax on withdrawals, some wealthy families could face an effective 85% to 90% tax rate on inherited pensions.
Returns are not guaranteed. What you will receive will depend on individual circumstances and future tax legislation, which cannot be guaranteed.
Who Will Be Most Affected By The 2027 Pension Changes?
The 2027 changes primarily impact:
- Retirees with large defined contribution pensions
Those who planned to leave their pension untouched for their children will now face IHT exposure. - Individuals with estates exceeding £325,000 (or £650,000 for couples)
Your pension will now push your estate above these thresholds. - Over-75s
Because Income Tax applies to beneficiaries when you pass away after 75, double taxation becomes unavoidable. - High-net-worth individuals (£2m+ estates)
Loss of the RNRB could result in near-total erosion of inherited pensions. - Non-spouse beneficiaries
While pensions passed to a spouse or civil partner remain exempt from IHT, children and other heirs will face the new charges.
Real Examples: How Much Tax Could Be Lost?
The figures below are illustrative examples designed to show how double taxation (Inheritance Tax and Income Tax combined) can erode the value of a pension when passed to beneficiaries.
These examples assume the entire pension is taxed at both rates for simplicity.
In reality, Inheritance Tax is charged on the total value of your estate above any available allowances, and the pension forms part of that total.
Actual figures will vary depending on your total estate value, personal tax position, and how allowances such as the nil-rate band and residence nil-rate band are applied.
Estate Value: £800,000 (includes £300,000 pension)
- Pension Value: £300,000
- IHT Rate: 40%
- Income Tax Rate: 20%
- Total Lost to Tax: £156,000
- % of Pension Lost: 52%
Estate Value: £1,200,000 (includes £500,000 pension)
- Pension Value: £500,000
- IHT Rate: 40%
- Income Tax Rate: 40%
- Total Lost to Tax: £320,000
- % of Pension Lost: 64%
Estate Value: £2,200,000 (includes £1,000,000 pension)
- Pension Value: £1,000,000
- IHT Rate: 40% + RNRB loss
- Income Tax Rate: 45%
- Total Lost to Tax: £870,000
- % of Pension Lost: 87%
Illustrative only. Figures assume no use of available exemptions or allowances and that the entire pension is subject to both Inheritance Tax and Income Tax. Actual tax treatment will depend on individual circumstances and may change in the future.
How to Protect Your Pension from Double Taxation
You cannot avoid the new legislation, but you can plan ahead to reduce its impact.
1. Use Gifting Allowances
Gift money while you are alive using annual exemptions or gifts out of income. Larger gifts can become IHT-free after seven years.
2. Review Pension Withdrawals
Consider accessing your pension earlier or using drawdown strategies to reduce your taxable estate.
3. Take Out Life Insurance
A life policy written in trust can cover the IHT bill, ensuring beneficiaries receive more of your wealth.
4. Update Your Will and Pension Nominations
Ensure your documents reflect the latest rules. Leaving pensions to a spouse may still be IHT-free, while other assets can be structured for children.
5. Seek Professional IHT and Pension Advice
A financial adviser can help you model scenarios and explore estate planning tools such as trusts, gifting, or investments qualifying for Business Relief.
Inheritance tax planning, will writing, and trust planning are not regulated by the Financial Conduct Authority.
Why IHT & Pension Planning Before 2027 Is Crucial
The upcoming IHT changes represent a major shift for retirees and investors.
By reviewing your pension and estate plan now, you can avoid the risk of losing most of your pension to tax.
Do not wait until April 2027. By then, it may be too late to make strategic moves.
Speak to a Specialist About Protecting Your Pension
You worked hard to build your pension. Do not let double taxation take it away.
Our advisers can help you:
- Review your pension structure
- Explore inheritance tax mitigation strategies
- Plan for a tax-efficient legacy
Book a Free Pension and Estate Planning Review Today.
Ensure your wealth goes to your loved ones, not the taxman.
Contact Our Team Here
The information provided is based on current legislation, which may be subject to change in the future. The guidance contained within this article is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.