Wealthy raid their pensions to avoid UK inheritance tax shake-up, advisers warn
Unused retirement savings could be taxed as part of overall estates after next year’s reforms
Wealthy families are fast-tracking lump-sum gifts to adult children and bringing forward planned pension income withdrawals ahead of a major inheritance tax shake-up next year.
Advisers and pension providers report a surge in access requests from clients with larger-than-average defined contribution pots, as concerns grow over a potential tax hit.
The urgency stems from reforms taking effect in April 2027, which will bring most unused pension wealth into the scope of inheritance tax.
The government estimates that in 2027-28, an additional 10,500 estates will face IHT after the change, and 38,500 will pay more — adding an average of £34,000 to liabilities.
“There’s now less than a year left before any unused pension savings could be included as part of pension savers’ estates for inheritance tax (IHT) purposes,” said Rachel Vahey, head of public policy at AJ Bell, the investment platform.
“The new rules have forced many people saving for retirement to rethink their plans and deal with a tax they never expected when they started putting money into their pension.”
From April 6 next year, unused pensions could face a 40 per cent IHT charge if the total estate exceeds the nil-rate band of £325,000.
Advisers say interest is rising in the main exemptions that can reduce inheritance tax liability.
These include the £3,000 annual gifting allowance, as well as the “seven-year rule”, under which no tax is typically due on gifts if you live for seven years after making them.
Another option is making regular payments to another person — for example, to help with living costs — provided these can be sustained after meeting your own usual expenses. These are known as “normal expenditure out of income”.
Royal London is among several major pension providers noting an increase in requests for tax-free cash linked to the IHT change.
“We have received a lot of questions from financial advisers about clients who want to gift large amounts to children for house purchases, for example, and that could often come from tax free cash,” said Clare Moffat, pensions and tax expert with Royal London.
“We have also had many queries from advisers about using the normal expenditure from income inheritance tax exemption.”
Jason Hollands, managing director of Evelyn Partners, the wealth manager, believes the IHT change is “likely playing a role” in clients accessing their pensions earlier and in larger amounts, particularly among non-advised investors on the firm’s Bestinvest platform.
Among their advised clients, he said, they are seeing increased “consideration” of earlier or larger pension withdrawals.
Sean McCann, chartered financial planner at NFU Mutual, is also seeing evidence of clients taking lump sums earlier in response to the IHT change, with many relying on the “gifts from normal expenditure” exemption. As these gifts are immediately outside the estate, there is no need to survive seven years.
“Gifts out of normal expenditure are one of the most valuable but least well-known inheritance tax exemptions, allowing those with surplus income to pass on wealth through regular gifting,” said McCann.
“There is no upper limit on the amount that can be given away, as it depends on an individual’s income and standard of living.”
He added: “As the exemption isn’t claimed until after death it’s important to keep records of your income, expenditure and gifts.”
With awareness of this surplus income exemption rising, advisers say it is important to seek advice as it is not “straightforward”.
“The question about whether gifts can be made out of pension income is potentially a tricky one,” said Elsa Littlewood, private wealth partner with BDO, the accountants.
“Where Mum and Dad have purchased an annuity for life, which gives them excess income, it seems reasonable that this could be gifted to their children (or other beneficiaries) under the gifts out of income exemption.
“However, where someone accesses their pension through flexible drawdown over a relatively short period, I can see a situation where [HMRC] might challenge a claim for gifts out of income. Individuals looking to use this exemption should proceed with caution and ensure they take tax advice from a specialist.”
Christine Ross, head of private office, north, with Handelsbanken, the wealth manager, advises clients to tread carefully with the “surplus income” exemption.
“We advise clients to ensure that this is documented and that gifts are made at a similar frequency and of a similar amount, to qualify.”