Unused pension savings could leave some families facing a combined tax exposure of up to 67% from April 2027, as changes to the inheritance tax treatment of pensions take effect. Nearly 40,000 people could face higher inheritance tax bills, with the average additional charge estimated at £34,000.
The warning comes from tax advisory firm Claritas Tax, which is urging people with substantial pension wealth to review how they organise their retirement finances and estates. The changes could alter a long-standing approach under which pension funds were preserved while other assets were spent first.
According to the Express, the potential 67% exposure reflects two separate taxes. A 40% inheritance tax charge may first be applied to the value of the pension, while income tax of up to 45% could then be charged on the remaining amount received by beneficiaries.
Claritas Tax said the impact would depend on individual circumstances, meaning withdrawing pension savings early is not automatically the most effective response. The firm instead advised people affected by the changes to consider their pension, retirement income and estate planning together.
Pension Withdrawals Could Become Part of Estate Planning
People with well-funded pensions may need to reconsider whether keeping as much money as possible inside a pension remains appropriate under the new rules. Adam Keates, associate partner at Claritas Tax, said there was “no silver bullet” for wealthy individuals with significant pension savings. Taking money from a pension during retirement would itself normally trigger an income tax charge, but he said this could still compare favourably with the possible tax burden after death. “That could still be attractive compared with a potential combined tax exposure of up to 67% at death,” Keates said.
According to Claritas Tax, pension withdrawals could in some circumstances be used to fund regular gifts from surplus income. The proceeds could also be directed towards tax-advantaged investment vehicles, although the firm stressed that decisions should reflect each person’s wider financial position.
Moving abroad during retirement could also affect the way pension income is taxed. The outcome would depend on personal circumstances and on the double taxation treaty applying between the relevant countries.
Keates said people with significant pension wealth should review their retirement and estate-planning arrangements before April 2027 because preserving pension savings while spending other assets first “may no longer be appropriate for everyone”.
Advisers Warn against Simply Emptying Pension Pots
Claritas Tax also cautioned against making large withdrawals purely in response to the inheritance tax changes. Any decision to take money from a pension can create an immediate income tax liability and may affect how much remains available to fund retirement.
According to Keates, people considering withdrawals need to examine “the immediate income tax cost, future retirement needs and what happens to the funds once they have been withdrawn”. The purpose, he said, should not simply be to remove money from a pension in an attempt to avoid inheritance tax. Instead, individuals may need to assess whether paying some income tax during their lifetime could result in a better overall position for themselves and their families.
That assessment forms part of a wider approach to succession and financial security, rather than a single response to the April 2027 changes. Claritas Tax therefore recommended that people avoid drastic action and seek financial and tax advice before altering their pension strategy. The central question is whether the existing balance between pension withdrawals, retirement needs and the assets ultimately passed to family members still produces the intended outcome once the new inheritance tax treatment takes effect.
