Inheritance tax shake-up pushes pensioners to make £1.4billion gamble - what you need to know

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Pension savings will soon become liable for inheritance tax from April 2027 under changes from the Labour Government

Older pension holders are racing to pull money out of their retirement funds ahead of the inheritance tax (IHT) shake-up due in April 2027, with new figures revealing a dramatic spike in activity.

Data from Lubbock Fine Wealth Management shows that individuals aged 75 and above took out £1.4billion in lump sums from private pensions in the most recent year on record, representing a 35 per cent jump compared with the £1billion withdrawn in the prior period.

This surge comes as the deadline for pensions to be brought within the scope of IHT draws ever closer, leaving many retirees just months to act.

The policy change was first unveiled during the Budget statement in October 2024, when the Government confirmed that unused private pension pots would fall within the inheritance tax net from April 2027.

The number of over-75s taking lump sums from their private pensions climbed 27 per cent to 83,800, up from 65,900 in the preceding year, according to the Lubbock Fine data.

Many of those withdrawing funds are doing so with the explicit intention of passing money on to children and grandchildren, whether to help them onto the property ladder or simply to move assets out of their taxable estate. Gifts made at least seven years before the donor's death are fully exempt from IHT.

Andrew Tricker, chartered financial planner at Lubbock Fine Wealth Management, said the Government's drive to boost HMRC's inheritance tax revenues is spurring growing numbers of older savers into taking decisive steps.

He said: "A huge number of people are now being proactive about cutting the IHT bills their children and grandchildren will have to pay.

"As the first pension pots get hit by IHT next year we could see even more intensive efforts to pass on assets IHT free."

He added that extracting a lump sum and using it to make gifts can prove more tax-efficient than leaving pension savings untouched, though he stressed that professional advice should always be sought beforehand.

Despite the potential tax advantages, Mr Tricker cautioned that withdrawing pension funds carries significant risks.

Individuals can typically take up to 25 per cent of their pension pot as a tax-free lump sum, capped at just over £268,000.

Any gifts made from withdrawn funds remain subject to HMRC's seven-year rule, meaning they could still attract some level of inheritance tax if the donor dies within that window.

Mr Tricker warned: "Money withdrawn from a pension is difficult to put back and they run the risk of finding themselves short of money later in retirement."

He also urged particular caution for those in poor health, noting they may wish to explore alternative strategies rather than gifting.

"There are other factors to take into account and that should be discussed with a professional," he said.