A major shift in UK pension taxation means doing nothing could become surprisingly expensive.
From April 2027, UK pension rules are set to change in a way that could quietly reshape estate planning.
For years, pensions have been one of the most tax-efficient ways to pass on wealth. Many advisers (rightly) encouraged clients to leave pensions untouched for as long as possible, using other assets first. But the upcoming changes could turn that long-standing strategy on its head—particularly once you pass age 75.
At the heart of this shift is a simple but powerful issue: the risk of a double tax hit on pension death benefits.
And for many families, that raises an important question:
Should you start taking your tax-free lump sum once you reach age 75?
The New Reality: A Double Tax Trap
Under current rules, pensions sit outside of your estate for Inheritance Tax (IHT) purposes. That’s what has made them such an effective wealth transfer tool.
However, from April 2027, pensions are expected to be brought into the scope of IHT. Combine that with existing income tax rules, and you create a potential double layer of taxation.
Here’s how that could play out:
- If you die after age 75, your beneficiaries already pay income tax on withdrawals from your pension.
- From 2027, those same funds could also be subject to IHT at 40%.
This means that in some scenarios, a pension pot could be taxed twice—once as part of your estate, and again when your beneficiaries draw income.
Even for a surviving spouse, who typically benefits from IHT exemption, the issue doesn’t disappear. While they may avoid IHT on transfer, any withdrawals they make from the inherited pension are still subject to income tax at their marginal rate.
The result? A structure that was once highly tax-efficient could become significantly less so.
Why Age 75 Is the Key Turning Point
Age 75 has always been an important milestone in pension planning.
Under current legislation:
- Death before age 75 → beneficiaries can draw pension funds tax-free (subject to limits).
- Death after age 75 → beneficiaries pay income tax on withdrawals.
From 2027, that second scenario becomes more problematic because IHT may also apply.
This creates a planning window. Once you are over 75, the argument for leaving pension funds untouched becomes weaker—especially if your estate is already likely to exceed the IHT threshold.
The Case for Taking the Tax-Free Lump Sum
The tax-free lump sum—typically up to 25% of your pension—has always been a valuable planning tool. But post-2027, it may become even more important.
By taking your tax-free cash after age 75, you effectively remove part of your pension from a structure that could otherwise face two layers of taxation.
This can be powerful for several reasons.
First, it reduces the amount of pension subject to income tax for beneficiaries. Less in the pension wrapper means less exposed to income tax on death.
Second, it gives you control. Rather than leaving tax outcomes to future legislation or your beneficiaries’ tax positions, you can proactively decide how and when funds are used or gifted.
Third, it opens up alternative planning opportunities. Once extracted, funds could be:
- Gifted during your lifetime (potentially reducing IHT exposure over time)
- Invested in ISAs for tax-free growth and withdrawals
- Used to support children or grandchildren when they need it most
In other words, the lump sum becomes a way of taking back control from the tax system.
But It’s Not a Simple Decision
While the logic is compelling, taking your tax-free lump sum is not automatically the right move for everyone.
There are trade-offs—and ignoring them could create unintended consequences.
One of the biggest considerations is Inheritance Tax exposure.
Once funds leave the pension, they typically fall into your estate. If you die within seven years of making gifts (or retain the funds), they could be subject to IHT. This partially offsets the benefit of removing them from the pension wrapper.
There’s also the issue of investment efficiency.
Pensions remain one of the most tax-efficient environments available:
- No capital gains tax
- No dividend tax
- Tax-deferred growth
By withdrawing funds, you may move money into a less tax-efficient environment unless carefully structured.
Timing matters too. If you don’t need the money, taking it early could simply accelerate tax exposure without delivering a meaningful benefit.
And then there’s behavioural risk. Accessing a large lump sum can lead to spending decisions that weren’t originally planned—something that shouldn’t be ignored in long-term planning.
The Spouse Scenario: Often Overlooked
Many assume that passing a pension to a spouse avoids most tax issues. While this is partly true, it’s not the full picture.
Spouses typically inherit pension funds free of IHT. However, once they begin drawing income, those withdrawals are taxed at their marginal income tax rate.
This becomes particularly relevant if:
- The surviving spouse already has pension income
- Withdrawals push them into higher tax bands
- The inherited pension is substantial
In this case, leaving large sums inside the pension may simply defer the tax problem rather than eliminate it.
Taking a lump sum earlier—when tax-free—can sometimes create a more balanced outcome across both lifetimes.
A Shift in Pension Strategy
For years, the dominant advice was clear: leave your pension untouched for as long as possible.
From 2027 onwards, that approach needs to be revisited.
The introduction of IHT on pensions fundamentally changes the equation. What was once a “last pot to touch” may become a strategic asset to actively manage, especially after age 75.
This doesn’t mean emptying your pension at the first opportunity. But it does mean reassessing:
- How much should remain inside the pension
- When to take tax-free cash
- How withdrawals fit into your broader estate plan
In many cases, a phased or partial approach will make more sense than an all-or-nothing decision.
The Bottom Line
The upcoming changes to pension taxation create a new reality for retirees and their families.
After age 75, the combination of income tax on death benefits and potential Inheritance Tax exposure introduces a genuine risk of double taxation.
Taking your tax-free lump sum won’t eliminate tax entirely—but it can reduce exposure, increase flexibility, and give you greater control over how your wealth is used and passed on.
The key is not to follow outdated rules of thumb.
Instead, this is about adapting to a changing landscape—one where pensions are no longer automatically the most tax-efficient asset to leave behind.
This is likely to become one of the most complex areas of financial planning from April 2027 onwards.
Every decision—whether to withdraw, gift, invest, or retain—needs to be considered in the context of your wider estate, your beneficiaries, and your long-term objectives.
Because in this new environment, doing nothing could be the most expensive decision of all.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
