The Pensions Robbery Tax?
Peter McGahan
Monday 18th August, 2025.
I’M disappointed…in a ‘seriously-you-thought-this-was-OK’ sort of way. The Treasury has decided to go ahead with the ‘pull a rabbit from the hat’ for April 2027. Not a fluffy nice bunny, type. More like a fatal attraction style.
From that date, most unused pension pots you leave behind will be dragged into your estate for inheritance tax. The very pensions you’ve been told for years were a safe harbour from that tax because they sat outside your estate if paid at the scheme’s discretion, are now being pulled back into the net. I call that retrospective legislation, something we were told would never happen. It puts a dent in people’s trust in the financial system and planning ahead because they have been creating a pension plan for decades on the basis of the tax and benefits. Had the government said: “all future plans will be affected” that would have been different.
Until now, the logic was simple. You die, your defined contribution pension sits outside your estate if the scheme has discretion over who gets it. The beneficiaries often get it free of inheritance tax, and sometimes free of income tax if you died before 75.
From April 2027, the value of unused pension funds and certain death benefits will be included in your estate for inheritance tax. Your executors, not the pension provider, will have to report, value, and pay the tax bill before they can get probate. If you die post-75, your beneficiaries could face both income tax on the drawdown and inheritance tax on the pot’s value.
Some exceptions survive. Ongoing dependant annuities are out, as is death-in-service. But the classic ‘leave the pension untouched and pass it to the kids tax-free’ plan? That ship is sailing, and it’s taking your inheritance tax shelter with it.
It means the retirement planning wisdom of the last decade - draw your ISAs first, leave the pension till last - is now looking wobbly. The old thinking worked because pensions were free from inheritance tax. From 2027, leaving a big pot untouched might just gift HMRC a windfall instead of your family.
It also means more admin and more cash-flow pressure for executors. They’ll need to value pensions, file the tax return, and pay the bill before the beneficiaries can even touch the pension. That could force quick sales of other assets, or borrowing, just to pay the taxman.
And let’s be clear. There’s potential for tax stacking. Imagine you die at 78 with a £500,000 pension. That could be £200,000 in inheritance tax plus income tax on the withdrawals your heirs make. Suddenly the tax-efficient legacy turns into tax-efficient for the government.
There are ways to soften the blow. Review your pension’s beneficiary setup so the scheme has discretion and update your expression of wishes. Hunt down any old non-discretionary contracts which pay to your estate automatically - some Section 32 and retirement annuity plans do this and think about modernising them if your health allows. Rethink your drawdown order and whether you should spend pensions earlier to preserve other tax-free wrappers. Build liquidity into your estate so executors can pay the tax without a fire sale. If you’re over 75, recognise you may now be handing over tax twice and look at whether charitable legacies or other forms of passing wealth make more sense. And if you’re seriously ill, avoid last-minute big pension contributions or shuffling death benefits into trusts, as that can already trigger a tax charge.
There are still plenty of methods to comfortably mitigate inheritance tax including the use of simple trusts and of course insuring against the tax and putting the death benefits of that into a trust, so your beneficiaries have the money to pay the tax as the death benefits do not form part of your estate. My gripe is that we should have had to consider them without this retrospective legislation.
Inheritance tax is still one of the most unpopular aspects of life in the UK, beyond midges, potholes, call-centre hold music and ring tones. This change just widened the net. But it’s not hopeless. With a few years’ notice, the right advice, and a clear plan, you can still make sure your pensions serve your family, not just the Exchequer.
For advice on your pension or inheritance tax, please call 01872 222422 or email info@wwfp.net
Peter McGahan is the Chief Executive Officer of independent financial advisers Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
