Could your pension assets be subject to an effective tax rate of 67%?
For many years, pension assets have enjoyed a special status: unlike most forms of wealth, they have usually been excluded from an individual’s estate for Inheritance Tax (IHT), which meant they could often be passed to loved ones without the 40% charge that applies to other assets.
From April 2027 this favourable treatment will end. Any money left in a pension will be treated as part of the estate for IHT purposes, and where the value exceeds available allowances, beneficiaries could face a 40% tax charge on the pension itself.
The impact can be even greater if the person inheriting also pays income tax on withdrawals, as happens when the account holder dies after age 75. For higher earners, the combined effect of IHT and income tax can erode the fund dramatically, leaving beneficiaries with as little as one third of the original pension value. In the most severe cases, a £500,000 pension could be reduced by up to 67% in tax before reaching the next generation.
This marks a significant shift in how pensions are treated on death and underlines the importance of careful forward planning.
A Worked Example
To see how these changes could affect families, let’s look at what happens to a £500,000 pension fund when the account holder dies after age 75.
It is worth noting that:
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Pensions left to a spouse or civil partner are normally exempt from Inheritance Tax (IHT).
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IHT only applies if the total estate, including the pension, exceeds the available nil-rate band allowances.
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The figures below show the impact where IHT is due and the pension passes to adult children or other non-exempt beneficiaries.
Step 1: Inheritance Tax (IHT)
Where IHT applies, the pension fund is first reduced by 40%. In this example:
- Initial Pension Amount: £500,000
- IHT at 40%: £500,000 x 40% = £200,000
- Remaining Pension Funds After IHT: £500,000 - £200,000 = £300,000
Step 2: Income Tax on the Inherited Pension (if death occurs after age 75)
If the account holder passes away after age 75, the beneficiary pays income tax at their own marginal rate when withdrawing the funds. This means the £300,000 remaining after IHT is treated as income and taxed according to whether the beneficiary is a basic rate, higher rate or additional rate taxpayer.
For example, if the beneficiary is an additional rate taxpayer, income tax at 45% would reduce the £300,000 by £135,000, leaving £165,000. The table below shows how this calculation works for different tax bands.
The Result
From the original £500,000 pension, an additional rate taxpayer inheriting the fund would receive only £165,000. Even at the basic rate, more than half of the pension’s value is lost to tax. This example highlights the significant impact of these changes on pension inheritance and underlines the importance of seeking advice from an expert financial planner.
Making the Complex Simple for British Expats Worldwide
At Forth Capital, we specialise in helping high-net-worth (HNW) internationally mobile executives build, optimise, and protect their wealth - before, during and after a move abroad.
Tax residency is more than a definition; it determines how your income, gains, and wealth are taxed, and underpins every financial decision as a British expat. With mobility between countries and the risk of dual residency, clarity on your status is essential before making choices around pensions, investments, property, or relocation. Contact us today to arrange an initial consultation.
 | Mark Routen As Forth Capital's Head of Tax, I provide tailored tax planning advice to high net worth international private clients. I help them understand their options, optimise their cross-border arrangements, and create a robust plan for their future. Get in touch here. |
Frequently Asked Questions
This term refers to the combined inheritance tax (up to 40%) and subsequent income tax (up to 45% for additional-rate taxpayers) on pension withdrawals—resulting in a potential effective tax rate as high as 67%.
The changes are set to come into force from 6 April 2027, as declared in the Autumn Budget 2024. These changes will bring unused pension funds and death benefits into the calculation of one’s estate for Inheritance Tax (IHT) purposes.
Unused pension funds, including death benefits, will be included in the deceased’s estate for IHT. Personal representatives (such as executors) will be responsible for reporting and paying any IHT due.
Approximately 213,000 estates are projected to include pension wealth in 2027–28.
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Of these, 10,500 estates will fall under IHT when they previously would not have, and
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38,500 estates will see increased IHT liabilities, on average by £34,000.
Yes. Transfers to spouses or civil partners remain IHT-exempt. Also, death-in-service benefits (depending on scheme type) are generally excluded from IHT.
This communication is provided for information purposes only and does not constitute financial, legal, or tax advice.All content is based on current UK legislation and may be subject to change. Planning arrangements should be reviewed regularly to ensure they remain appropriate in light of legislative updates. Pension regulation and tax treatment differ between jurisdictions. Any reference to UK or international pension rules is presented in general terms and should not be taken as advice tailored to individual circumstances. Examples are hypothetical and provided for illustrative purposes only—actual outcomes will vary depending on personal circumstances and local laws and regulations. Pension transfers involve specific risks and may not be suitable for everyone. The suitability of any pension transfer or investment should always be assessed on an individual basis.Past performance is not a reliable guide to future results. The value of investments may fall as well as rise, and you may not get back the amount originally invested.
Last updated 1 September 2025
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