One Regime To Rule Them All

One regime to rule them all.

One regime to guide them.

One regime, replace them all.

And in the process, bind them.

In April 2006 they called it Pension Simplification.

Twenty years of layered complification later, and your children may pay inheritance tax and income tax on the same pension pot.

There And Back Again

Before we get to where we are today, it's worth remembering where we were. Because the story of pension taxation is not simply a story of government overreach.

It begins, genuinely, with a good idea.

Pre 2006, the UK pension landscape was a patchwork of eight separate tax regimes, each with its own rules, its own limits, its own quirks. Occupational pensions operated differently from personal pensions. Executive schemes had their own regime entirely. Moving jobs, consolidating pots, understanding what you were entitled to, all of it was needlessly complicated. For advisers, for scheme trustees, and most of all for ordinary people trying to plan for retirement, it was a mess.

A-Day, 6 April 2006, changed that.

One set of rules replaced eight. A single Annual Allowance. A single Lifetime Allowance.

A single, coherent framework for how pension savings were taxed, contributed to, and eventually paid out. For the first time, pensions became genuinely flexible: you could consolidate, you could contribute more, you could plan properly. And crucially, for those who didn't exhaust their pension in retirement, the death benefit rules opened up. Your pension could become a meaningful part of what you passed on to the next generation.

It was, in the truest sense, simplification.

And it worked.

One regime to rule them all.

And for a while, it did exactly that.

My Precious

Here's the problem with pensions: no government can leave them alone.

Not one government, all of them. Labour. Coalition. Conservative. Labour again. Each new chancellor arrived and found an enormous pool of private wealth, sitting quietly, following its own rules. And each one found the temptation irresistible. Not to destroy the system, but to adjust it. To add a layer. To close a loophole. To raise a little more.

The Lifetime Allowance was introduced in 2006 as part of simplification itself, a ceiling on the total pension wealth you could build up tax-efficiently. Reasonable in principle. It even increased initially.

Then it was cut.

Then cut again.

Then frozen.

Then it became a source of such complexity and injustice, particularly for NHS consultants and senior public servants, that it was abolished entirely in 2023.

Then sort-of-resurrected in a different form.

The ring, once put on, proved very difficult to put down.

But while governments were repeatedly tightening, freezing, abolishing and redesigning pension limits, something else was happening too.

The pension freedoms introduced in 2015 fundamentally changed how people viewed defined contribution pensions. The requirement to buy an annuity by 75 disappeared. Drawdown became the default for millions. Money could stay invested, growing, and in many cases passing between generations largely outside the inheritance tax net.

Advisers began having different conversations. Not simply about funding retirement income, but about intergenerational planning, tax efficiency, and long-term family wealth.

Pension Freedoms should probably have been the first real alarm bell. For the first time, individuals could access pension wealth with extraordinary flexibility, including withdrawing entire pension pots in one go if they wished.

Some did exactly that. Large withdrawals generated substantial tax receipts for the Treasury as pension funds were dragged rapidly into higher and additional-rate tax bands instead of being drawn gradually across retirement.

The government learned something important: pensions were no longer merely retirement income products. They had become vast reservoirs of accessible private capital.

And as pension wealth continued growing into the trillions, sitting increasingly outside the inheritance tax net, the Treasury eventually noticed.

Patient capital, you might say.

Or, from another vantage point: My Precious.

The Return Of The King

The October 2024 Budget announced what many in the industry had feared: from 6 April 2027, most unused pension funds will be brought within the deceased's estate for Inheritance Tax purposes.

The pension, for so long a planning tool as well as a retirement vehicle, would be taxed like everything else.

The announcement was accompanied by a consultation.

Then draft proposals.

Then technical responses.

Then, today, HMRC published its technical note.

Here, in brief, is the world your executor will inherit.

Personal representatives, the people administering your estate, become liable for reporting and paying IHT on your pension assets. But the moment pension benefits are allocated to a beneficiary, that beneficiary becomes jointly and severally liable too. And if the pension scheme administrator fails to action a withholding notice correctly, they join the liability queue as well.

Three parties. One tax bill. All potentially responsible.

Your executor will need to identify every pension you ever held, including that deferred pot from an employer you left twenty years ago. They'll need to contact each scheme. Request valuations. Receive them within 28 days, or an estimate, with the final figure to follow within 14 days of it being confirmed. If a pension turns up after the IHT account has already been filed, they'll need to submit a corrective account.

One death. Multiple pensions. Endless paperwork.

If there's a risk IHT might be due, your executor can issue a withholding notice, instructing the pension trustees to hold back up to 50% of a beneficiary's entitlement. A separate notice for each scheme. On an HMRC template not yet published. Under regulations not yet finalised. With guidance promised for April 2027, the same month the rules come into force.

New rules. Unwritten forms. Unfinished guidance.

Then there's the interaction between Inheritance Tax and Income Tax. If the pension member dies after 75, the beneficiary pays income tax on what they draw down, that part isn't new. But from April 2027, they'll also face IHT on the same pot. Whether they get relief from double taxation depends on how the IHT was paid. Via a payment notice through the scheme? That reduces the income taxable amount. Paid directly to HMRC? A different process. Paid via the personal representative? Different again.

One pension. Two taxes. Three possible processes.

And for estates above £2 million, the Residence Nil Rate Band, worth up to £175,000 per person, begins to taper away at £1 for every £2 of estate value, disappearing entirely above £2.35 million for a single person, or £2.7 million for a couple. Bring a pension into that calculation, and many estates that comfortably sat below those thresholds no longer do.

One extra asset. One lost allowance. One much larger tax bill.

The Toll

The numbers, at their worst, are staggering.

Since the 2024 Budget, examples have been published showing effective tax rates on inherited pensions of around 87%, and in some scenarios even higher.

HMRC's latest technical note does at least attempt to reduce straightforward double taxation. Broadly speaking, where Inheritance Tax is paid on pension death benefits, beneficiaries should not then also pay Income Tax on that same slice of pension wealth.

That helps.

But it does not eliminate the wider problem.

Because the most punitive outcomes are not caused by a single tax charge. They arise from the interaction of multiple tax layers: inheritance tax, the loss of the residence nil-rate band, and income tax on pension withdrawals.

Take a widower with a £1m pension and an estate already near the residence nil-rate band taper zone.

First, the pension may suffer IHT at 40%.

Second, by increasing the estate value, it may wipe out up to £350,000 of residence nil-rate band, creating a further £140,000 IHT cost elsewhere in the estate.

Third, if the beneficiary draws inherited pension income while already earning over £100,000, the withdrawals may fall into the 60% effective income tax band created by the personal allowance taper.

Stack those layers together and the overall effective tax burden can still become extraordinarily high, even after HMRC's proposed mitigations.

Tax on the pension. Tax because of the pension. Tax on the beneficiary of the pension.

I will cover some of the more extreme scenarios, including where the widely quoted 87% figure comes from, in a separate article. Because once you start modelling the interaction between these rules in detail, the outcomes become far more complicated than a single headline percentage suggests.

One Regime

Nobody planned for this outcome in 2006.

But in hindsight, it was almost inevitable. Eight separate regimes would have required eight separate political battles every time a chancellor wanted to tinker.

Legislation across eight frameworks. Industry resistance multiplied eightfold.

One regime offered no such protection.

One lever is simply easier to pull.

And every government since has pulled it, each one leaving its mark, each mark a little more expensive than the last.

The architecture of simplification became the architecture of its own undoing.

One regime replaced them all.

One regime combined them. 

One regime betrayed us all.

And let the taxman mine them.

 This article is general information, not regulated financial advice. Tax treatment depends on individual circumstances and may change. Please take advice specific to your situation before making any decisions.