The potential impact is prompting advisers to question a long-standing approach to retirement planning, under which pension savings have often been preserved while other assets are spent first. Claritas Tax says people with significant pension wealth should now review whether that strategy remains appropriate for their circumstances.
How the Potential 67% Tax Exposure Arises
The figure does not represent a single 67% tax charge. Instead, according to the Daily Express report, it reflects the potential effect of a 40% inheritance tax charge applied to the value of a pension, followed by income tax of 45% on the remaining amount.
Government figures cited in the report suggest that those affected could see their average additional tax bill rise by £34,000. Claritas Tax estimates that almost 40,000 people will be affected by higher inheritance tax liabilities. The change has implications for people who have deliberately retained large pension pots as part of their estate-planning arrangements. Adam Keates, associate partner at Claritas Tax, said there was “no silver bullet for wealthy individuals with well-funded pensions”.
One possible response would be to draw down pension funds during retirement, although doing so can itself trigger an income tax charge. Keates said that paying tax while still alive could, in some cases, compare more favourably with the potential combined exposure after death. “That could still be attractive compared with a potential combined tax exposure of up to 67% at death,” he said.
Claritas Tax has also cautioned against treating pension withdrawals as a simple way of reducing inheritance tax. The decision, it said, must take account of an individual’s retirement requirements as well as the tax consequences of withdrawing funds.
Advisers Urge Pension Holders to Review Estate Planning
According to Claritas Tax, people with substantial pension wealth should reassess their retirement and estate-planning arrangements before April 2027 rather than automatically continuing to preserve pension funds.
The firm suggested that pension withdrawals could be used to support regular gifts made from surplus income or directed into tax-advantaged investment vehicles. It also noted that moving abroad during retirement could alter how pension income is taxed, depending on a person’s circumstances and the relevant double taxation treaty.
Keates said the established practice of keeping pensions intact while using other assets first “may no longer be appropriate for everyone”.
At the same time, he warned pension holders against taking drastic action or simply emptying their pension pots. Decisions should instead be considered alongside immediate income tax costs, future retirement needs and what happens to withdrawn money afterwards.
“The aim should not be to withdraw money solely to avoid IHT,” Keates said, “but to determine whether paying some income tax during their lifetime could produce a better overall outcome for them and their family as part of a wider strategy for succession and financial security.” Claritas Tax said people considering changes should do so in consultation with financial and tax advisers, taking their wider financial position into account.
