Financial advisers are urging people in their 50s and 60s to review their pension arrangements before April 2027, when most unused pension funds and death benefits will be counted towards an estate for inheritance tax purposes. The change, already set out in law, means pension savings could face a 40% charge where an estate exceeds the available tax-free allowances.
Experts warn that rushing to withdraw savings or gifting money without a plan could prove costly. The key message is to look beyond inheritance tax and consider what the pension must provide first: an income that could have to last for decades.
Tax Implications of Withdrawals
Taking money out of a pension is not automatically a way to protect an inheritance. Withdrawals can trigger income tax, while money moved into a bank account may still form part of an estate on death. Financial advisers told Newspage that the starting point should be a full picture of finances, including pensions, ISAs, property and other income.
Richard Squire, founder and CEO of London-based MyFinanceFuture, said mistakes could be costly. He added: “We’ve seen many people take up cashflow planning over the last two years in response to the pensions inheritance tax change. It’s causing many to switch to draw on pension assets first when funding retirement, not last. This has big implications for tax in retirement, with the potential for a lot more tax to be paid earlier.”
Common Mistakes and Gifting Concerns
Squire noted that the impact is often tens and sometimes hundreds of thousands of pounds in lifetime tax, so mistakes can be costly and, in some cases, impossible to fully fix later. He listed common errors, including planning based on one or two main drivers such as inheritance tax, acting on generic guidance without considering a family's specific situation, reducing pension contributions without properly considering associated benefits, and facing unplanned tax bills due to lack of flexibility in retirement funds.
Rakhee Wood, founder and Independent Financial Adviser at Bromley-based Butterfly Financial Planning, said knee-jerk decisions should be avoided. She added: “The biggest mistake is rushing to cash in pensions because of the inheritance tax changes. Pensions are there to fund your retirement, not simply provide an inheritance. People in their 50s and 60s should review their pensions, ISAs, property and future income needs before making decisions.”
Wood also warned that gifting is not necessarily the answer, as pension withdrawals can trigger income tax and gifts may remain within an estate for seven years. She advised modelling different scenarios rather than making knee-jerk decisions.
Clarity on Retirement Goals
Graham Nicoll, financial planner and Chartered FCSI at NCL Wealth Partners, said people needed to be clear on what they wanted from retirement. He added: “Pensions were always designed as a tax-efficient way of saving for retirement... they still provide significant value for this purpose. It is important to step back and really understand what lifestyle an individual wants to lead today, tomorrow and in retirement... and on the retirement point the question of when they want the freedom to have choices.”
Harvey Dhillon, founder and CEO at Zmartly, highlighted the importance of checking the form that tells a pension scheme who should inherit the pension. He said that from April 2027, the spouse or civil partner exemption covers only what goes to them, and an unmarried partner is not covered. He also noted that if someone dies in their 50s or 60s, beneficiaries usually pay no income tax on the pension, but from April 2027 income tax falls only on what is left after any inheritance tax they pay.
Samuel Mather-Holgate, managing director and Independent Financial Adviser at Swindon-based Mather and Murray Financial, urged people in their 50s and 60s to review their estate planning now. He added: “Before anyone panics, let's remember that most families won't pay inheritance tax at all. Married couples and civil partners leaving their family home to children can potentially pass on £1 million tax-free, provided they meet the qualifying conditions. But for wealthier families, there's a nasty sting in the tail.”
Mather-Holgate stressed that from April 2027, most unused pensions will be dragged into the inheritance tax net, potentially triggering a 40% bill, with beneficiaries possibly facing income tax on withdrawals too, particularly where someone dies after 75. He advised reviewing estate planning now, with sensible gifting and pension withdrawal strategies potentially saving children a fortune, while warning against panicking and cashing everything in.
