From April 6, 2027, UK law will include unused pension savings within the value of someone’s estate for Inheritance Tax (IHT) purposes. That means pensions – once seen as a tax‑efficient legacy tool – could now trigger an effective 67% tax hit for beneficiaries, especially top earners.

Why This Matters Now

Picture this: you’ve built up pension savings. After you die, your beneficiaries inherit those funds, but…

1. IHT at 40% hits first, especially if the estate has used its nil‑rate band or lost residence allowance.
2. The beneficiary then withdraws or draws down that pension and pays income tax:
• Basic‑rate → overall ~52% tax
• Higher‑rate → ~64% effective
• Additional‑rate → up to ~67%

That effective 67% tax rate emerges because of the combined IHT plus income tax burden.

The Hidden Shockwave for Estates

Estates approaching £2 million can lose the residence nil‑rate band (£175,000), escalating IHT risk. Even married couples often lose up to £350,000 of tax‑free benefits. Assets previously sheltered in pensions may now inflame IHT exposure.

This isn’t just a minor tweak. It’s a seismic shift in how pensions are viewed and taxed after death. Pensions are being redefined away from legacy tools toward taxed estate assets.

Five Strategies to Beat the 67% Pension Tax Trap

1. Gift While You’re Alive

Gifting assets can reduce the size of your taxable estate:

• Use the £3,000 annual gift allowance.
• Consider Potentially Exempt Transfers (PETs) — gifts that become tax‑free if you survive for seven years after making them.

This approach can help you pass wealth directly to loved ones without triggering the pension tax trap.

2. Spend From Your Pension Strategically

If you don’t need to preserve your entire pension for inheritance, consider drawing it down during your lifetime.

Many advisers are now suggesting drawdown rates of 6–6.5% instead of the traditional 4% rule, especially for those looking to minimise IHT exposure. Spending from your pension could actually save your family money.

3. Make ISAs Work Harder

ISAs can be a powerful inheritance planning tool:

• They don’t attract income tax on withdrawals.
• They sit outside of the combined pension IHT trap.

By balancing contributions between ISAs and pensions, you can build a more tax‑efficient legacy.

4. Consider Life Assurance in Trust

A whole‑of‑life insurance policy written in trust can provide liquidity for your beneficiaries and help cover any tax bill. Because the policy is held in trust, it falls outside your estate for IHT purposes.

This strategy is becoming increasingly popular among high‑net‑worth individuals preparing for the 2027 changes.

5. Organise Your Pension Paperwork

It’s not just about tax. Executors are now required to report pension assets accurately.

Failing to submit the right paperwork can lead to penalties ranging from £100 to £3,200. Keeping your records in order will save your family both stress and money.

At SJB Global, we believe in giving you clarity, not complexity. The upcoming changes to pension IHT aren’t just a tax tweak; they’re a wake‑up call for anyone serious about preserving wealth.

Here’s what we focus on:

• Urgency: Acting before April 2027 could save families thousands.
• Relief: Strategic planning brings peace of mind.
• Curiosity: There are smarter ways to structure your estate.

With the right plan, you can transform a looming tax hit into a controlled, tax‑efficient inheritance strategy.