Will Your Pension Be Taxed Twice? What the 2027 ‘Double Death Tax’ Means for Families
Unused pension funds will become subject to IHT from April 2027
Back in the '90s, WWF wrestler Jake “The Snake” Roberts would strike fear in the ring with his signature move – the DDT. Fast forward to today, and there’s a new DDT causing a stir – the pension ‘Double Death Tax’.
This refers to the scenario where pension funds may soon be hit twice – first by Inheritance Tax (IHT) on death, and again by income tax when beneficiaries draw on the remaining funds.
In this week’s blog, we take a closer look at the government’s recently confirmed changes to pension legislation – due to take effect from April 2027 – and the significant planning implications that come with them.
We explain how the new rules apply in practice, where they’re particularly punitive – including cases where they trigger the tapering of the Residence Nil-Rate Band – and what (little) was tweaked in the final policy announcement on 22nd July.
We also share some of the adjustments we’re making to clients’ financial plans, in light of the changes.
Government Confirms New Rules
On 22nd July, following a six-month consultation, the government confirmed it will press ahead with a major shift in pension legislation, originally announced in Rachel Reeves’ 2024 Autumn Statement.
From 6th April 2027, any unused pension savings will form part of your estate for IHT, removing the longstanding exemption currently in place.
Despite widespread lobbying from the pension industry, the government has stuck to its guns – though it did make one minor (and welcome) adjustment.
Originally, it was proposed that Pension Scheme Administrators (PSAs) would handle the IHT on pensions, while Personal Representatives (PRs) covered the rest of the estate. This would’ve been a logistical headache – especially for clients with multiple pension schemes.
Instead, PRs will now be responsible for reporting and paying IHT on the entire estate, including pension funds – a more practical outcome.
The rules also give PRs some flexibility over how the IHT bill is settled:
Direct from the estate: PRs use liquid estate assets to pay HMRC.
Scheme-paid: Beneficiaries can ask the pension provider to pay HMRC directly.
Reimbursement route: Beneficiaries pay the tax themselves and reclaim any income tax paid on that portion.
Separately, it was confirmed that Death in Service benefits – when paid from a registered pension scheme – will remain exempt from IHT, as hoped.
It was also confirmed that the spousal exemption continues to apply, meaning a surviving spouse can inherit unused pension savings IHT-free.
Medium Estate, Big Impact
The new rules are forecast to raise £1.5 billion per year by 2029/30, with the average IHT bill rising by around £34,000. However, in certain cases, the impact will be far more severe.
Here’s a worked example of where it is particularly hard-hitting:
Case Study - RNRB Taper
James and Ana, both aged 80, have total assets of £2.5 million – comprising £2 million in non-pension assets (including their main residence worth £750,000), and £500,000 in pension savings.
To date, they’ve left their pensions untouched – a deliberate strategy to keep them outside the estate and pass them to their three children IHT-free. But from April 2027, that strategy is no longer valid.
The table below compares their projected IHT exposure before and after the rule change:
That is, James and Ana currently face a potential IHT liability, on second death, of £400,000, with their three children standing to inherit a combined £2.1 million, or £700,000 each.
However, from April 2027, they face a £300,000 increase in IHT overnight to £700,000, with each child set to receive £100,000 less.
In this example, the effective IHT rate on their £500,000 pension pot isn’t 40% - it’s 60%! This is because the pension savings will push the estate value above the £2 million threshold at which their Residence Nil-Rate Band entitlement starts to taper (it is reduced by 50p in the £1 above this level).
This is where the new rules really bite – not only do pensions incur tax, but they also trigger the tapering of the RNRB, compounding the IHT bill.
The Double Death Tax
The main criticism of the new rules is the risk of being taxed twice on pension wealth: once through Inheritance Tax (IHT) on the estate, and again through income tax when beneficiaries draw on the funds provided the previous policyholder died after age 75 (if they were younger, withdrawals remain income tax-free).
Revisiting the previous example...
Soon after the new rules take effect in April 2027, James and Ana sadly pass away. Their £500,000 pension pot is split evenly between their three children, each inheriting c. £167,000 (assuming no growth in the meantime).
These funds are received via beneficiary’s drawdown – a continuation plan in the child’s name.
As James and Ana were over age 75 at death, any withdrawals by their children will be taxed as income at their marginal rates. All three are high earners, meaning any withdrawals would incur 40–45% income tax.
In short: the pension is first hit with 40% IHT, then potentially taxed again on withdrawal – a brutal combination for wealth passed outside the spousal exemption.
Mitigating the Charge
Fortunately, there’s a lot that can be done to limit the impact of the Double Death Tax (DDT). Two planning themes remain ever-relevant – with a third now emerging in response to the recent rule change (flexibility over IHT payment):
1. Build Pension, Spend Pension
Pensions remain one of the most tax-efficient ways to build wealth – with upfront tax relief, tax-free growth, and, generally speaking, 25% of funds accessible tax-free in retirement (up to £268,275).
But with pensions now forming part of the estate for IHT, the strategy of leaving them untouched for inheritance is no longer optimal. They should now move up the withdrawal order, often ahead of ISAs and other liquid assets.
Where possible, withdrawals should be kept within the basic-rate tax band (up to £50,270 total taxable income), though that won’t always be feasible.
That’s why we often cite £1.0–1.2 million as the ‘magic number’ per person when it comes to pension planning.
On sensible assumptions – a 30-year retirement, modest investment growth, and no other significant sources of income beyond the State Pension – this level of pension wealth can typically be drawn gradually, keeping total taxable income within the basic-rate band (up to £50,270 per annum), and depleting the pot over your lifetime to avoid the DDT.
Please note, a pension is a long-term investment and funds are not normally accessible until 55 (rising to 57 from April 2028). When investing via a pension, your capital is at risk. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
2. Manufacture Surplus Income to Fund Regular Gifts
Another route we’re exploring with clients is the idea of generating surplus income via their pension – either through drawdown or a lifetime annuity – with the intention of gifting that surplus to loved ones.
The goal here is to take advantage of the Normal Expenditure Out of Income (NEOI) exemption, which allows gifts to be made free of IHT immediately – with no seven-year rule – provided three key conditions are met:
The gift is regular in nature (monthly, quarterly, annually, etc.);
It is made from income, not capital;
It does not affect your standard of living – i.e. it’s from surplus income.
Ideally, pension income is kept within the basic-rate tax band (up to £50,270), meaning only 20% tax is suffered upfront. But once gifted under the NEOI rules, this income then avoids 40% IHT on death, and sidesteps any future income tax charge for the beneficiary.
There are also two extensions of this strategy:
a) Pension Income → Child’s Pension
Rather than simply gifting the income to your child, you could direct it into their pension.
For example, say you draw £10,000 from your pension and incur £2,000 in basic-rate tax, netting £8,000. You then gift that amount to your child – a qualifying NEOI gift (i.e. free from IHT).
They in turn contribute the £8,000 into their pension, which is grossed up to £10,000 by HMRC. And if your child is a higher-rate taxpayer, they’ll receive a further £2,000 back via self-assessment – meaning more tax back than was paid.
b) Pension Income → Whole of Life Premiums
Surplus pension income can also be used to fund premiums on a Whole of Life insurance policy, held in trust, designed to cover the eventual IHT bill. It’s not for everyone – psychologically or emotionally – but we’ve seen cases where the numbers genuinely stack up.
Click here for our previous blog that walks through the figures in detail.
3. Keep Expressions of Wishes Up to Date
There’s also planning potential in who you nominate to inherit your pension, particularly around the key age 75 threshold.
From April 2027, if you pass away before age 75, any unused pension funds passed to non-spouse beneficiaries will be subject to IHT, but future withdrawals by those beneficiaries will be free of income tax.
If death occurs after age 75, the funds face both IHT and income tax on subsequent drawdown – the full force of the Double Death Tax.
With this in mind, some planning strategies might include:
Pre-75: Consider nominating adult children or a discretionary trust, enabling them to inherit IHT-exempt funds with no future income tax on withdrawals.
Post-75: Consider nominating minor grandchildren, who may have access to their full £12,570 personal allowance each year – allowing tax-efficient withdrawals over time. For example, drawing £12,570 per year, then allocating £9,000 into a Junior ISA, and the remainder into a Bare Trust or even Premium Bonds (with tax-free prize potential). Withdrawals and management would typically be overseen by the children’s parents or Guardians.
Final Thoughts
From April 2027, pension funds will no longer be exempt from Inheritance Tax – and in many cases, could be taxed twice: IHT on death, then income tax on withdrawal. For some, the combined hit could exceed 60%.
While this is a significant shift, it also creates planning opportunities. From rethinking the withdrawal order, to creating surplus income for gifts, or changing your Expression of Wishes around age 75 – there are steps that can help reduce or even avoid the so-called Double Death Tax.
That said, everyone’s circumstances are different – which means the right strategy will vary case by case.
This article does not constitute advice. If you're unsure how the new rules may affect you, we recommend speaking to a qualified financial adviser. If you'd like our help, please get in touch.
Happy Thursday!
Kind regards,
George
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