‘Quid Game

Welcome to ‘Quid Game - the pension inheritance tax edition. Like the cult Netflix series, this is a high-stakes elimination contest where the rules keep changing, the players never fully understand what's happening, and by the end, almost everyone has lost something valuable.

The government has finally published the draft legislation for bringing pension wealth into the inheritance tax net from April 2027. We thought we might escape elimination from the game. We were wrong.

What Changed – And What Didn’t

In my article back in my March, I suggested the government might soften or delay these changes. I thought the consultation responses, industry pressure, and sheer administrative complexity would force a rethink.

Well they did listen to the consultation - all 649 responses of it - but only to fix the administrative mess, not reconsider the policy.

The only change they did make was to have personal representatives (executors), not pension schemes, to handle the inheritance tax calculations and payments.

This was to prevent a systemic problem: pension scheme trustees would pay maximum tax upfront to avoid penalties, regardless of whether it was actually due. A £500,000 pension fund would trigger a precautionary £200,000 payment, with schemes holding beneficiaries' money hostage while HMRC slowly processed refunds.

While that may help the pension industry it is not a great outcome for families. Dealing with estates can be complicated enough without throwing the complexities of the moving parts of pensions into the mix.

The fundamental change remains. From April 2027, most unused pension funds and death benefits will be subject to inheritance tax.

From 2027: What’s Changing

For those wanting the full technical breakdown, read my companion article here – but for context, here’s what’s changing.

In scope from April 2027:

• Uncrystallised pension funds

• Unused drawdown funds

• Most pension death benefits

Still excluded:

• Death-in-service benefits

• Dependants' scheme pensions

• Spousal/charity transfers (existing exemptions)

How Much More Tax?

Let me walk you through one of the government's examples from their Consultation Outcome paper.

Meet Amir, who dies at age 80 with a £400,000 defined contribution pension fund and £1,000,000 in other assets.

Before April 2027:

• Pension fund: £400,000 (inheritance tax-free)

• Other assets: £1,000,000

• Less nil-rate band: £325,000

• Inheritance tax due: £270,000 (40% of £675,000)

• Beneficiaries receive: £1,130,000 net

After April 2027:

• Total estate value: £1,400,000 (including pension)

• Less nil-rate band: £325,000

• Inheritance tax due: £430,000 (40% of £1,075,000)

• Beneficiaries receive: £970,000 net

Amir's family loses an extra £160,000 to inheritance tax - increasing their tax bill from £270,000 to £430,000.

But it gets worse. When the beneficiaries actually withdraw money from that pension (remember Amir died after 75), they'll pay income tax on every pound. A higher-rate taxpayer taking out £100,000 would pay £40,000 income tax on top of the inheritance tax already paid.

That's the 64% effective rate in action: £100,000 becomes £36,000 after both taxes.

The government promises mechanisms to prevent double taxation, but here's what I think they mean. Say £40,000 inheritance tax has been paid on a £100,000 pension fund from the estate. The pension scheme then pays out the full £100,000 as income, all of which gets taxed through PAYE. But logically, only £60,000 should have been paid out since £40,000 was already collected as inheritance tax. The "relief mechanism" will presumably refund the excess income tax paid on that £40,000 - but the brutal 64% effective rate on what's actually received remains unchanged.

The Cliff Edge Conundrum

Here’s the real weakness in the whole system: inheritance tax will now apply to all pension deaths, regardless of age, but the income tax rules still draw a hard line at age 75, with no good reason.

Die at 74 years and 364 days, and your beneficiaries receive income tax-free distributions. Die the next day, and they’ll pay income tax at their marginal rate. Layer inheritance tax on top, and we get to the 64% and 67% rates discussed.

This cliff-edge isn’t just unfair – it’s a structural inconsistency.

Rather than designing a coherent system, the government has bolted inheritance tax onto pensions by tweaking the Inheritance Tax Act 1984, while leaving the core pension legislation untouched.

That’s why we now have a system where both IHT and income tax can apply to the same pot, but in inconsistent and sometimes contradictory ways.

It’s already prompting some perverse planning behaviour. I've heard suggestions that individuals will begin cashing in their entire pensions at age 74¾, accepting guaranteed tax rates that could exceed 50% (once personal allowance tapering and higher rate bands are factored in), then gifting the net amount, to avoid a potentially larger combined tax later.

If they live seven years, the funds fall out of their estate. If they don't, the taxable outcome is slightly worse, but at least it's certain.

That’s not smart tax planning, it’s voluntary taxation. And it shows just how flawed the new regime really is.

Is It Really Worth It?

The government estimates 213,000 estates annually have inheritable pension wealth. 10,500 estates will become liable for inheritance tax where previously they wouldn't and 38,500 estates will pay more inheritance tax than before.

They believe the average inheritance tax bill per affected estate will increase by £34,000.

That’s £1.46 billion in additional tax revenue by 2029-30.

To put it in context, the National Insurance increase raised £24 billion. The total income tax take is in excess of £300 billion.

This is a lot of political capital being spent for a policy that adds complexity, generates relatively modest revenue, and risks undermining confidence in pensions.

If they'd genuinely wanted to stop pensions being used for wealth transfer rather than retirement, there was a simpler approach:

• Option 1: No inheritance tax on pensions, but income tax at recipient's marginal rate on any benefits taken by anyone, regardless of the deceased's age at death.

• Option 2: Keep the age 75 rules for all ages, but make all pension death benefits subject to inheritance tax - clean, simple, no double taxation.

Either would have achieved the policy objective without creating this administrative nightmare. But that would have required actually rewriting pension legislation rather than just sticking an IHT label on existing rules.

Could There Be a Future Backtrack?

In the short term? Absolutely not. This is happening in April 2027, and no amount of industry protest will change that. Labour has the parliamentary numbers and the political will to see it through.

But longer term? Never say never. Governments change and so do tax policies. A future Chancellor could easily revisit this if:

• The administrative burden proves unworkable

• The combined tax rates become a political embarrassment

• Pension saving rates collapse among younger generations

Inheritance tax itself has had a turbulent history. It was abolished in 1979, reintroduced in 1986, and has been revised and rebranded countless times since.

The Lifetime Allowance? Introduced in 2006, increased, then chipped away over a decade before finally being abolished in 2024.

Pension contribution rules have fared no better. We've gone from sliding scales based on earnings, to unlimited contributions, to £40,000 annual limits, then down to £10,000, then £4,000, now back to £10,000 with multiple tapers and traps along the way.

These new inheritance tax changes, dramatic as they may seem, are just the latest chapter in a long-running story of policy churn.

Pensions are for life not just for the electoral cycle.

So let’s not be tempted to make irreversible decisions now, just because a policy is due in 20 months’ time. If history teaches us anything, it’s that pension legislation is constantly evolving. Today’s headline may be tomorrow’s footnote.

The Pension Case Remains Strong

Despite the changes ahead, pensions remain the single best way to save for retirement in the UK. Yes, the inheritance tax rules are shifting but that doesn't mean it’s time to abandon contributions.

Consider what still makes pensions uniquely powerful:

• Tax relief on contributions (20%, 40%, or 45%)

• Tax-free investment growth over decades

• 25% tax-free lump sum on withdrawal

• Flexible access to income from age 55 (rising to 57)

• Still outside the estate for most practical purposes today and for spouses going forward

Even with inheritance tax entering the frame from 2027, pensions remain significantly more tax-efficient than most alternatives, particularly ISAs.

Here’s the uncomfortable truth: pensions have been too generous for too long. Funded from gross salary, often topped up by employers, growing entirely tax-free, and, until now, passed on completely free of inheritance tax. It was a tax-planning dream.

Contrast that with an ISA: funded from net income, no upfront tax relief, and fully exposed to inheritance tax. That's the same 64% effective hit - a 40% taxpayer must earn £33,333 to fund a £20,000 ISA, which then faces 40% inheritance tax on death, leaving beneficiaries with £12,000. Yet no one is rushing to cash in their ISAs.

The inconsistency is striking. Pensions, with relief at every stage, now face political backlash. ISAs, less generous and still within the IHT net, are treated as sacred.

In fact, there was national uproar at the mere suggestion of reducing the cash ISA allowance.

Let’s be clear: pensions remain an exceptional way to build, shelter, and draw down long-term wealth. One policy change doesn’t undo decades of tax advantage.

X2Z Comment

The frustrating part of this process isn’t that the government chose to tax pension wealth - that was probably inevitable given the fiscal pressures. It’s the way they’ve done it.

Instead of building a coherent system, they’ve stitched inheritance tax rules onto pension legislation like a fiscal Frankenstein’s monster. The result? Confusion, complexity, and years of unintended consequences. The legal and professional fees alone may end up costing families more than a simpler, well-designed system ever would.

After all, in Squid Game, the real winners weren’t the players, they were the ones running the game.

In 'Quid Game, the winners won’t be pension savers or their beneficiaries. They’ll be the tax advisers, estate planners, and administrators who’ll spend the next decade unravelling this mess.

The game is now set.

April 2027 is coming, and complaining about fairness won’t change the rules. The smart response is to adapt, understand the terrain, and make measured decisions not panic moves.

Which brings me back to the sudden interest in “cash-it-all-in-at-74” planning.

This isn't clever strategy, it's a guaranteed tax payment today against a possible one tomorrow. In most cases, it sacrifices decades of tax-free growth and optionality for a short-term illusion of control.

It’s not planning. It’s capitulation.

And perhaps that’s the plan, The Great Pension Reset.

A rapid extraction of pension wealth from baby boomers through accelerated taxation, then a return to normal. A reset, timed to target the generation who built the biggest pots thanks to generous contribution rules, final salary schemes, and a head start on property.

Because let’s be honest, the era of million-pound pension pots is already over. For the younger generation, who are struggling to save for a house deposit, let alone put aside at least 20% of their income each year for retirement, this was never their game to win.

If you're concerned about how these changes affect your situation, let's discuss your specific circumstances well before April 2027.