Following recent changes to inheritance tax rules, pension assets will become liable for the HMRC levy from next year
Wealthy individuals sitting on large pension pots face a punishing combined tax burden of up to 67 per cent when unused pensions fall within the scope of inheritance tax (IHT) from April 2027, Claritas Tax has warned.
The tax advisory firm estimates that the change will leave approximately 38,500 estates paying higher IHT bills, with the average additional liability for those affected climbing by roughly £34,000, based on Government figures.
Claritas Tax is urging those with substantial pension wealth to reassess their estate-planning arrangements ahead of the deadline, as the traditional strategy of preserving pension funds and depleting other assets first may no longer serve everyone's interests.
The 67 per cent figure is based on the 40 per cent inheritance tax charge pplied to the pension's value, followed by income tax at 45 per cent levied on what remains.
Adam Keates, an associate partner at Claritas Tax, said: "There is no silver bullet for wealthy individuals with well-funded pensions."
Drawing down pension funds during one's lifetime would trigger an immediate income tax charge, but Mr Keates suggested this route could still prove preferable.
He added: "That could still be attractive compared with a potential combined tax exposure of up to 67 per cent at death."
Among the planning strategies highlighted by Claritas Tax, affected individuals could use pension withdrawals to fund regular gifts out of surplus income or channel the proceeds into tax-advantaged investment vehicles.
The firm also pointed out that relocating abroad in retirement might alter how pension income is taxed, though the outcome would depend on the applicable double taxation treaty and personal circumstances.
He shared: "Those with significant pension wealth should review their retirement and estate-planning strategy before April 2027. The long-established approach of preserving a pension and spending other assets first may no longer be appropriate for everyone."
Despite the potential tax savings, Mr Keates cautioned against drastic action, warning that individuals should not simply drain their pension pots in response to the rule change.
He recommended that any decisions be taken alongside financial and tax advisers.
The tax expert noted: "Any decision must consider the immediate income tax cost, future retirement needs and what happens to the funds once they have been withdrawn."
Mr Keates emphasised that tax considerations alone should not dictate financial choices.
He shared: "The aim should not be to withdraw money solely to avoid IHT, but to determine whether paying some income tax during their lifetime could produce a better overall outcome for them and their family as part of a wider strategy for succession and financial security."
