How your family could pay Inheritance Tax AND Income Tax on the same pension pot — and what to do before April 2027.
Most people who have built up a decent pension pot believe they have done the right thing. They have saved diligently, taken advantage of employer contributions, and created a pot of money that sits outside their estate — protected from inheritance tax when they die.
That protection ends on 6 April 2027.
From that date, unspent pension funds will be brought inside your estate for inheritance tax purposes. On its own, that is a significant change. But there is a second tax charge that very few people are talking about — and when you put the two together, the numbers become genuinely alarming.
If your pension is inherited by someone who draws the money down, they will face income tax on every pound they take out. Which means the same pot of money is taxed twice — once through inheritance tax when you die, and again through income tax when your beneficiary draws it.
This is what I call the pension double tax trap. And if you have a meaningful pension, a property, and any other assets, this affects you.
Part one: what changes on 6 April 2027
Right now, pensions sit outside of your estate for inheritance tax purposes. This is one of the most valuable features of a pension as a financial planning tool — not just for retirement income, but as a vehicle for passing wealth to the next generation.
Under the current rules, if you die before age 75 with unspent pension funds, your beneficiaries typically receive the pot free of income tax. If you die after 75, your beneficiaries pay income tax on withdrawals at their marginal rate — but there is no inheritance tax on the pension itself.
From 6 April 2027, confirmed by HMRC following the Autumn Budget 2024, unspent pension pots will be brought inside your estate for inheritance tax. The nil rate band remains at £325,000 per person and the residence nil rate band at £175,000 — but for anyone with a pension, a property, and savings, those thresholds are crossed quickly.
The IHT rules — now and from April 2027
Nil rate band — £325,000 per person (frozen until at least April 2028)
Residence nil rate band — £175,000 where a main home passes to direct descendants
IHT rate above threshold — 40%
Pensions now — outside your estate, no IHT charge
From 6 April 2027 — unspent pensions inside your estate, subject to IHT at 40%
That alone is a serious planning issue. But it is only half of the problem.
Part two: the income tax charge your beneficiaries will pay
This is the part of the story that most commentary on the 2027 changes has glossed over. And it is arguably the more damaging of the two charges for many families.
When a beneficiary inherits a pension and draws money from it, that withdrawal is treated as income and taxed at their marginal rate. This rule applies where the pension holder died after the age of 75. It is not a new rule — it exists today. But from April 2027, it stacks directly on top of the new IHT charge on the same pension pot.
Before April 2027, the income tax on drawdown was the only levy on an inherited pension. The pension sat outside the estate, so there was no IHT on it. From April 2027, IHT hits first on death — then income tax hits again when the beneficiary draws the money. The same pot. Two separate taxes. In sequence.
The pension pot is taxed when you die. Then taxed again as income when your family spend it. This is the double tax trap — and most people have no idea it is coming.
Part three: Dave’s story — the numbers made real
The scenario below shows Dave’s position under the post-6 April 2027 rules only. Under today’s rules, Dave’s pension sits entirely outside his estate and faces no inheritance tax charge whatsoever. That is the critical difference the 2027 changes create.
Dave is 79. He has done everything right. He has saved consistently, built a pension he has not needed to fully draw down in retirement, and owns his home outright. Here is his position.
Dave’s estate
Property, ISA and other savings — £500,000
This figure sits exactly at Dave’s combined nil rate band + residence nil rate band threshold.
Unspent pension pot — £500,000
Under today’s rules — the pension is outside the estate. No IHT on the pension. Dave’s non-pension assets sit within his threshold, so his family’s IHT bill is zero.
From 6 April 2027 — the pension is pulled inside the estate. His total taxable estate becomes £1,000,000.
Today’s rules
£0
IHT on Dave’s estate. Pension sits outside. Non-pension assets sit within the threshold.
From April 2027
£200,000+
IHT due. Pension now inside the estate, pushing £500,000 above the threshold.
Tax charge one: inheritance tax on the pension — from April 2027
From 6 April 2027, Dave’s £500,000 pension is inside his estate. His combined nil rate band and residence nil rate band is £500,000 — which is fully absorbed by his property and other assets. The entire pension sits above the threshold and is subject to inheritance tax at 40%.
| Dave’s estate — under post-April 2027 rules | Value |
|---|---|
| Property, ISA and other savings | £500,000 |
| Pension pot (unspent) — now inside the estate | £500,000 |
| Total estate | £1,000,000 |
| Combined nil rate band + RNRB | — £500,000 |
| Taxable amount (the pension) | £500,000 |
| Inheritance tax at 40% | £200,000 |
| Under current rules the pension is excluded entirely. Dave’s family would pay zero IHT. | |
HMRC takes £200,000 in inheritance tax directly from the pension pot. The pension remaining for Dave’s children after that charge is £300,000.
Tax charge two: income tax when Dave’s children draw the pension
This is where the double tax trap becomes real. Because Dave died after the age of 75, every pound his children withdraw from the inherited £300,000 is taxable income in their hands — charged at their own marginal rate. The income tax is applied to what remains after IHT, not to the original pot.
Beneficiary income tax bandTax on each withdrawal
Basic rate taxpayer (income up to £50,270)20%
Higher rate taxpayer (£50,270–£125,140)40%
Additional rate taxpayer (above £125,140)45%
If Dave’s children are higher rate taxpayers, they pay 40% income tax on every pound drawn from the remaining £300,000. Here is exactly how the money flows — and disappears.
Dave’s original pension pot£500,000
Less: inheritance tax at 40% on full pot— £200,000
Pension remaining after IHT£300,000
Less: income tax at 40% on £300,000 (higher rate taxpayer)— £120,000
What Dave’s family actually receives£180,000
The double tax — summary
Original pension pot — £500,000
Inheritance tax paid on death — £200,000
Income tax paid on drawdown (higher rate taxpayer) — £120,000
Total tax paid — £320,000
Dave’s family receives — £180,000 from a £500,000 pot
64% of the pension goes to HMRC. 36 pence in every pound reaches the family.
Figures assume the beneficiary is a higher rate taxpayer and draws the full pension in the same tax year. The actual outcome depends on the beneficiary’s income, how withdrawals are spread, and individual circumstances. Scottish income tax rates differ.
Dave saved carefully for forty years. His pension was meant to look after his family. Under the post-2027 rules, without planning, 64 pence in every pound goes to HMRC — taxed once on death, and taxed again when it is spent.
Part four: who is most at risk
Not everyone is equally exposed to the double tax trap. But the combination of factors that create the worst outcomes is more common than people realise.
You are most at risk if:
- You have a pension pot above £150,000 that you do not expect to fully draw down in retirement
- You own a property that, combined with your other assets, already pushes your estate close to or above the nil rate band
- You are aged over 75, or will likely be over 75 when your pension is eventually inherited
- Your children or other beneficiaries are higher or additional rate taxpayers in their own right
- You have not reviewed your pension nomination of beneficiaries recently
The group that sits squarely in this risk zone includes business owners and senior employees who have maximised pension contributions over a long career, people who retired early and have other income sources so have not needed to draw heavily on their pension, and couples who have each built up pension pots alongside a family home.
Part five: what good planning looks like before April 2027
The 2027 changes create urgency. But they do not mean pensions are a bad place for your money. They mean the strategy for how you draw down your assets — and in what order — now needs careful thought. What is right for one person may not be right for another. Individual circumstances matter enormously.
Spend the pension earlier, not later
The long-standing approach was to preserve the pension and draw from ISAs and other savings first, because pensions sat outside the estate. From 2027, that logic needs revisiting. Drawing from the pension earlier in retirement — rather than leaving a large unspent pot to face both IHT and income tax on death — may now be the more tax-efficient approach for some people. This will not be right for everyone and depends on your individual circumstances.
Consider the sequencing of your withdrawals
The order in which you draw from different assets — pension, ISA, property equity, cash — now has inheritance tax implications it did not carry before. Getting sequencing right requires looking at your whole financial picture, not your pension in isolation.
Review your pension nominations
Your pension nomination of beneficiaries tells your pension provider who you want to receive your pension on death. This is entirely separate from your will. If your nomination is out of date, or if you have never completed one, your pension may not go where you intend. The choice of beneficiary — and how they are likely to be taxed — becomes more significant in the post-2027 world.
Think about gifting now, not later
Annual gifting allowances, potentially exempt transfers, and other gifting strategies can reduce the size of your estate over time. For anyone with a large pension alongside a large estate, starting this planning well before 2027 gives more options.
Speak to an independent financial adviser before the rules change
These decisions are not simple. The interaction between inheritance tax, income tax, drawdown strategy and beneficiary planning requires a whole-of-estate view. This is exactly the conversation a regulated independent financial adviser is there to have with you.
Important — please read
Compliance and regulatory disclosure
All figures in this article are for educational and illustrative purposes only. They do not constitute personal financial advice and should not be relied upon as such.
Tax figures referenced reflect rates and allowances for 2026–27. Tax rules can and do change. The April 2027 pension IHT changes were confirmed by HMRC following the Autumn Budget 2024, but remain subject to final parliamentary process.
Income tax bands quoted are for England, Wales and Northern Ireland. Scottish taxpayers are subject to different income tax rates and bands.
The FCA does not regulate estate planning or tax advice. Always seek regulated independent financial advice before making any pension or estate planning decisions.
Lee Gardner is an Independent financial adviser authorised and regulated by the Financial Conduct Authority.
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If you have a pension, a property, and a family you want to protect, the 2027 rule changes are not something to leave until the last minute. The planning window is open now — and the earlier you start, the more options you have.
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