Major pension tax changes are coming in April 2027, affecting how pension pots are inherited and taxed. Learn how to plan ahead with smart tax strategies, from pension withdrawals to tax-efficient investments, so you can protect more of your money for the future.

As of April 2027, the changes announced in the last Autumn Budget will take effect. The new tax rules will impact how pension pots are inherited so early planning is essential – especially if you rely on private pensions for retirement.

What are the proposed changes?

From 6 April 2027, the following changes will apply:

• • Inheritance tax (IHT) will be charged on unspent pension pots.
  • Potential IHT Rates of up to 60% – Due to residence nil rate band (RNRB) changes, pension pots passed down on death could have an effective IHT rate as high as 60%.
  • Income Tax on Withdrawals – Those inheriting a pension will pay income tax on withdrawals. Combined with IHT, this could mean taxes of up to 90%.

While these changes may seem daunting, there are ways to manage pension wealth efficiently and enough time to mitigate potential tax liabilities.

Tax Planning Strategies to Consider

1. Strategic Pension Withdrawals and Gifting

One approach is to withdraw pension funds earlier than planned and strategically gift surplus income to family members. Under existing tax rules, certain gifts from surplus income can be exempt from IHT without being subject to the usual seven-year rule.

However, pension withdrawals (excluding the 25% tax-free lump sum) are generally taxed at the individual’s marginal income tax rate. In some cases, effective tax rates could reach as high as 60% (or 67.5% for Scottish taxpayers), so careful planning is required for this approach to be beneficial.

2. Reinvesting in Family Pensions

Another approach would be to withdraw pension funds and contribute directly to the pensions of children or grandchildren. This would provide two key advantages:

• Tax relief: Recipients may be eligible for income tax relief on pension contributions, effectively reclaiming tax paid by the donor.
• Annual allowances: Contributions are capped at an individual’s available annual allowance (currently up to £60,000). Those without UK earnings can contribute up to £3,600 per year and still receive tax relief.

The tax status of both donor and recipient would affect this approach, but contributions in this way could be tax-neutral or result in overall tax savings.

3. Exploring Tax-Efficient Investments

If pension contributions aren’t an option, alternative investments may offer tax benefits. Including:

• The Enterprise Investment Scheme (EIS)
• The Seed Enterprise Investment Scheme (SEIS)

Both schemes listed would reduce overall tax exposure while allowing more room to grow your pot.

Pension Changes for 2025: What You Need to Know

While the 2027 changes will impact inheritance tax planning, important changes are coming in the next financial year which could affect your retirement plans.

The State Pension is set to Increase from April 2025

In April 2025, the state pension will rise in line with inflation:

• New State Pension – Increasing to £230.25 per week (up from £221.20).
• Basic State Pension – Increasing to £176.45 per week (up from £169.50).

While this increase provides a welcome boost, the future of the ‘triple lock’ (which guarantees annual state pension rises) remains uncertain. While it is secure for now, there may be changes in the future due to the rising costs of state pensions.

National Insurance (NI) Contributions Top-Up Deadline

April 2025 is also the deadline to top up NI contributions. If you have taken a career break or spent time as self-employed you may have gaps in your NI record. Having at least 35 years of NI contributions is essential to qualify for the full state pension, and topping up could be highly beneficial in the long run. You can check your state pension via HMRC’s online tool – Check your State Pension forecast – GOV.UK.

Pensions Dashboard

The Pensions Dashboard is set to launch, a single platform for individuals to track pension savings. Large providers must submit data by April 2025, and the full rollout is expected by 2027. This tool will allow more straightforward financial planning for those juggling multiple pension pots.

Planning for the upcoming changes

Although there is still time to plan and reassess pension strategies, we advise clients to start as early as possible. This will help you save as much of your hard-earned money as possible. The right approach will depend on individual circumstances, including tax brackets, pension sizes, and overall financial objectives.

For further advice and help navigating these changes, we recommend speaking with Fielding Financial Services. Their expert team can help tailor a pension strategy that aligns with your financial future.

Tax on a private pension you inherit – GOV.UK

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