Warning: from 2027 unused pensions could face inheritance and income tax simultaneously

Pensions are about to stop being the clean inheritance shelter many UK savers assumed they were. From 6 April 2027, the government plans to bring most unused pension funds and pension death benefits into the inheritance tax net. But the part that’s making people nervous is the overlap — because the old income-tax rules on inherited pensions do not disappear just because inheritance tax arrives. ### What actually changes in 2027? Right now, unused defined-contribution pension pots usually sit outside your estate for inheritance tax. That is why pensions became such a popular estate-planning tool — people spent other assets first and left the pension untouched. The government’s change, announced in the Autumn Budget 2024 and carried into draft legislation and consultation documents, would include most unused pension funds and death benefits in the value of your estate from 6 April 2027. Death-in-service benefits from registered pension schemes are set to stay outside the estate. (gov.uk) ### Why are people calling it “double taxation”? Because two different taxes can hit the same pension money at different points. First, inheritance tax may apply when the pension value is counted inside the estate. Then, if the beneficiary later draws money from that inherited pension, income tax can still apply under the existing death-benefit rules. HMRC’s own consultati(gov.uk)ax bill and still owe income tax on those withdrawals at their marginal rate. (gov.uk) ### Where does age 75 come in? That part is not new. Under current rules, inherited pension payments are usually tax-free if the original pension holder dies before 75, subject to some limits and timing rules. If the pension holder dies at 75 or older, beneficiaries usually pay income t(gov.uk)income tax on top of inheritance tax already charged against the estate. (gov.uk) ### Is the “45%” warning right? Sometimes — but it is not the ceiling. If inheritance tax takes 40% and the beneficiary later pays basic-rate income tax at 20% on what remains, the combined effect is roughly 52% of the original pot gone. If the beneficiary pays 40% income tax, the combined effect rises to about 64%. At the additional rate of 45%, it reaches roughly 67%. So the viral warning is directionally right about th(gov.uk)t the worst case. That math is an inference from the tax rules, not a standalone HMRC table. (gov.uk) ### Does this hit everyone with a pension? No — and that matters. Inheritance tax only bites if the estate exceeds available allowances, and transfers to a spouse or civil partner are generally exempt. The government and outside estimates both suggest the change will mainly hit larger estates, not every family with a pension. But for households that deliberately left pensions untouched to pass wealth down, this is a real reset. (obr.uk) ### Why did the government do this? Basically, pensions had become an inheritance tax workaround as much as a retirement product. The Budget framed the move as making the system fairer by treating unspent pension wealth more like other assets. The Office for Budget Responsibility also expects the change to raise more tax over time, which tells you this is not a tiny technical tweak. (assets.pu([obr.uk)ee8c4905/Autumn_Budget_2024__web_accessible_.pdf)) ### Who needs to think about this now? Anyone in the UK with a large pension pot, a potentially taxable estate, and children or other non-spouse beneficiaries. The risk is highest where the pension holder may die after 75 and the heir is a higher-rate taxpayer. In those cases, “leave the pension till last” stops being obviously smart. (assets.publishing.service.gov.uk)t is simple — from April 2027, unused pensions are no longer safely outside inheritance tax, and after 75 they may still trigger income tax as well.