Will You Still Need Me, When I'm 64 (%)

The government’s plan to tax pensions on death could leave beneficiaries facing a combined tax rate of up to 64% is certainly causing pensioners to lose their hair!

While most eyes are on income tax thresholds, spending cuts, and fiscal headroom ahead of the Spring Statement, financial planners have something else quietly sitting near the top of their watchlist: the proposed changes to how pensions are treated for Inheritance Tax (IHT).

Set to take effect from April 2027, the shift would see unused pension pots brought into the IHT net for the first time. It’s currently in consultation, but many in the profession are working on the assumption it will go ahead in some form.

However, with the consultation closed, the legislation still unwritten, and growing pressure on the Chancellor to restore stability and avoid unintended consequences, this Spring Statement might just be the moment for a softening or delay.

What’s Changing?

Under current rules, pensions usually sit outside the estate for IHT purposes. That’s allowed many clients, particularly those with other sources of income, to use pensions as an effective estate planning tool – a way to pass on wealth free of IHT while using other assets for day-to-day living.

From April 2027, the plan is to treat unused defined contribution pension funds as part of the deceased’s estate, potentially subjecting them to 40% tax above the available nil rate bands.

Defined benefit survivor pensions are expected to remain outside scope, but for most people using income drawdown or building up personal pensions, this could be a game-changer.

So how do we get to 64%? Let’s take a simple example.

A £100,000 pension pot, left untouched at death, could be subject to 40% inheritance tax, reducing it to £60,000. If the beneficiary is a higher-rate taxpayer and pays 40% income tax on the withdrawn funds, they’re left with just £36,000.

That’s a combined tax take of 64%. 67% for an additional rate taxpayer.

And in some more convoluted scenarios, such as those involving the loss of the residence nil rate band, the personal allowance or more complex trust arrangements, I’ve seen articles suggest the effective tax rate could reach 90%. But that’s very much at the extreme end and not typical.

Why the Pushback?

The pension industry has been vocal during the consultation, not just in the technical detail, but in challenging the direction of travel. A pension is supposed to fund retirement, not be disincentivised as a savings vehicle.

It’s not the idea of taxing pensions on death that’s causing the biggest stir, it’s how the government is proposing to go about it.

The plan to treat unspent pension pots as part of a person’s estate for IHT purposes may sound simple enough, but the execution is anything but. According to policy experts, it risks being costly, complex, and counterproductive.

Before 2015, death benefit taxation was already a tangle of variables, lump sum or pension, pre- or post-75, crystallised or uncrystallised, with some scenarios taxed at 55%. George Osborne’s reforms that year weren’t accidental generosity; they were a deliberate simplification tied to the introduction of pension freedoms.

Now, we’re at risk of undoing that simplicity. The current proposal adds a fresh layer of administrative burden, not just for families, but for pension providers and scheme administrators, who may find themselves:

• Responsible for calculating and paying IHT bills

• Having to liaise with executors or representatives, assuming there is one (and over half of UK adults still don’t have a will)

• Delaying payments, especially where pension pots include illiquid assets like property

• Facing potential interest charges if probate delays push them beyond the six-month deadline

The rules would apply regardless of who inherits the pension, meaning even spouses and civil partners (normally exempt from IHT) would be caught in the admin process, despite no tax being due. It's a sledgehammer to crack a nut.

Worse still, the proposed rules retain the 75 age cliff-edge, meaning someone dying after 75 could see their pension taxed under both IHT and income tax. For a higher-rate taxpayer beneficiary, this could result in an effective tax hit of over 60% on inherited funds. In some cases, it could be higher still.

These aren't just quirks, they're avoidable design flaws that risk creating unnecessary friction, delays, and costs, which will inevitably trickle down to savers.

Could There Be a U-Turn?

This is where the Spring Statement may become more interesting than expected.

The government is under pressure from all sides: borrowing costs are high, growth is low, and it’s already raising significant revenue from frozen thresholds and stealth taxes.

At the same time, the pensions-IHT proposal risks creating planning distortions, accelerating income withdrawals, encouraging artificial gifting, and creating tension between tax policy and long-term retirement planning.

It’s entirely possible that the response to the consultation offers more nuance, particularly on:

• Whether the change applies to funds in drawdown

• Whether tapering or exclusions will be introduced

• Whether the timeline may be pushed back to allow for more planning certainty

It would be a welcome opportunity for the Chancellor to demonstrate pragmatism, without needing to row back on headline pledges.

What Should You Be Doing Now?

Until we have clarity, this is a planning period, not yet a doing period. But that doesn’t mean standing still.

Here are a few conversations worth having now:

• Re-evaluate pension strategies – particularly for those over 75, or those with large untouched pots.

• Consider tax-free cash withdrawals – either for use or gifting. Gifting into trust is time-sensitive due to the seven-year clock.

• Explore gifting out of income – especially those that have surplus pension income and want to reduce IHT exposure over time.

• Review use of discretionary trusts – particularly for those wanting to gift while retaining some control.

• Discuss protection planning – such as life cover to meet a future IHT liability, though underwriting hurdles grow with time.

• Ensure family members are informed – many of these changes, if implemented, will require coordinated planning and a clear understanding of intentions.

Final Thoughts

There’s a strong argument that pensions should return to their original purpose: to provide retirement income, not be stockpiled to pass on. But if that’s the direction of policy, it needs to be rolled out with clarity, fairness, and a workable transition.

The Spring Statement on 26 March might not be a “Budget” but don’t be surprised if it contains a quiet revision or clarification on the proposed IHT treatment of pensions. It could be a sensible moment for the Chancellor to show that policy stability doesn’t have to mean rigidity.

Watch this space and be ready to adapt.

I'm in your estate, three years from now,

Taxman at the door

I used to be tax-free, now I’m IHT,

Now I’m 64 (%)!

I used to be ring-fenced, not any more

A change you can't ignore.

Will you still fund me, or will you just shun me?

When I’m 64 (%)!