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Almost 84,000 over-75s have withdrawn lump sums from their pensions, latest data shows, as the clock ticks down to changes that will bring unused pension pots into the Inheritance Tax (IHT) net from April 2027.
People aged 75 and over withdrew more than £1.4bn in lump sums from their private pensions in 2024, the latest year for which data is available, and a 35% increase on the £1bn withdrawn the preceding year, according to new analysis by Lubbock Fine Wealth Management.
The number of over-75s taking lump sums from their pensions also jumped by 27%, from 65,900 to 83,800. Andrew Tricker, Chartered Financial Planner at Lubbock Fine Wealth Management, said, “The Government’s effort to increase HMRC’s tax take through Inheritance Tax is likely to be galvanising more over-75s into action.
“As the first pension pots get hit by IHT next year, we could see even more intensive efforts to pass on assets IHT-free. A huge number of people are now being proactive about cutting the IHT bills their children and grandchildren will have to pay.”
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If you’d benefit from expert advice on how inheritance tax changes could impact your pension, Rest Less members can book a free initial consultation with Fidelius, a Chartered Financial Planning firm. It’s a chance to chat with a qualified financial advisor about your finances and how you might be able to reduce any potential IHT liability. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Fidelius is rated 4.7/5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
What’s changing with pensions and Inheritance Tax?
The Government announced at the Autumn Budget in October 2024 that from April 2027, unused private pension pots and certain pension death benefits will become liable to inheritance tax. You can find out more about these changes in our article Inheritance tax and pensions: what’s changing in 2027.
These changes might be behind more over-75s withdrawing lump sums from their pensions, so they can make gifts to their heirs or use them in another more tax-efficient way. Pensions have traditionally been an attractive way of passing wealth to the next generation because unused pension savings have generally fallen outside your estate for IHT purposes, provided the relevant conditions were met.
However, experts warn that withdrawing pension money simply to avoid a potential future IHT bill can be a risky strategy, particularly for older people who may need their pension savings to fund the rest of their retirement.
“Withdrawing a pension lump sum can give some flexibility over their savings, for example to help children or grandchildren buy a home,” said Mr Tricker. “However, they must do it after careful financial planning. Money withdrawn from a pension is difficult to put back and they run the risk of finding themselves short of money later in retirement.”
It’s important to remember that these changes do not mean that every pension will automatically face a 40% tax charge, however.
IHT is only payable where the overall value of an estate exceeds the relevant tax-free thresholds, after taking account of available exemptions and reliefs. Most estates are still expected to remain outside the IHT net. You can learn more about these in our guide What is Inheritance Tax?
The Government estimates that around 213,000 estates with inheritable pension wealth will be affected by the changes in 2027/28. It estimates that around 10,500 estates will face an IHT liability where they otherwise would not have done, while around 38,500 estates will pay more IHT as a result of the pension changes.
When can taking money out of your pension reduce IHT?
For some people, taking money out of a pension and giving it away during their lifetime could reduce the eventual value of their estate, meaning a smaller potential Inheritance Tax bill for loved ones.
But there is an important distinction between taking money out of a pension and making a gift. If you withdraw money and simply keep it in a bank account or invest it elsewhere, it will generally still form part of your estate when you die. Moving money from a pension into another account does not, by itself, make it exempt from IHT.
The potential IHT benefit comes if the money is genuinely given away and the gift falls outside the estate under HMrC’s gifting rules.
Under these rules, gifts can become exempt from IHT if the person making the gift survives for seven years after making it. If they die within seven years, the gift may still be taken into account when calculating IHT. You can find out more about the seven-year rule in our article Inheritance Tax: what are potentially exempt transfers?
The tax treatment can also depend on the type and size of the gift and the other gifts made during the person’s lifetime. Taper relief may reduce the rate of IHT due on certain gifts made between three and seven years before death, although it does not simply make every gift tax-free after three years.
This means someone who is considering withdrawing pension savings to give money to their children or grandchildren needs to think carefully about both the pension withdrawal and gifting rules.You can learn more about gifting rules in our article Which gifts are exempt from Inheritance Tax?
Watch out for tax on pension withdrawals
If you’re planning to take a lump sum from your pension to gift to loved ones, make sure you check how much tax might be payable on your withdrawal.
There is also a common misconception that everyone can withdraw £268,275 from their pension tax-free.
Usually, you can take up to 25% of your pension benefits tax-free, but the standard Lump Sum Allowance is currently £268,275 across all your pension arrangements, rather than £268,275 from each pension. Learn more in our article How much tax-free cash can I take from my pension?
For example, someone with a £400,000 pension could normally take up to £100,000 as tax-free cash, assuming they have sufficient Lump Sum Allowance available and haven’t already nused part of it.
Someone with a pension worth £1.2 million could theoretically take 25% or £300,000 as a lump sum. However, the standard Lump Sum Allowance is £268,275, so the additional £31,725 would not normally be tax-free and could be subject to income tax.
There can also be exceptions for people with certain forms of protected pension allowances, so anyone considering a large withdrawal should check their individual position.
Find out more in our guide How much tax will I pay on pension withdrawals?
Will you have enough pension savings left to support you throughout retirement?
One of the biggest dangers of withdrawing pension money purely for IHT planning is that you could live much longer than expected.
A pension is designed to provide an income throughout retirement, potentially for decades. Money given away to family cannot easily be recovered if circumstances change.
For example, someone might withdraw £100,000 from their pension and give it to their children. If they subsequently face higher care costs, need to move home, or simply live for another 15 or 20 years, they may regret having given away money that could have helped fund their own retirement.
Don’t make pension decisions based on IHT alone
If you have a sizeable pension and an estate that could potentially become liable to IHT, the forthcoming changes make it more important to consider your pension as part of your wider estate-planning strategy.
Withdrawing money is only one possible option. Some people may be better off continuing to use their pension to provide an income in retirement, while others may benefit from spending their pension rather than other assets. The most suitable approach will depend on a range of different factors including your age, health, income needs, other savings and investments, property wealth, your family circumstances and the likely size of the estate.
It’s important to remember that giving away money you need to maintain your standard of living in retirement could leave you financially worse off simply to reduce a tax bill that may never arise. If you are considering withdrawing a substantial amount from your pension, particularly to make gifts to family members, it is therefore worth seeking financial advice before making a decision.
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If you’d benefit from expert advice on how inheritance tax changes could impact your pension, Rest Less members can book a free initial consultation with Fidelius, a Chartered Financial Planning firm. It’s a chance to chat with a qualified financial advisor about your finances and how you might be able to reduce any potential IHT liability. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Fidelius is rated 4.7/5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
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