Wealthy individuals with substantial pension savings could face a combined tax burden of up to 67 per cent when new inheritance tax (IHT) rules take effect in April 2027, according to tax experts at Claritas Tax. The warning comes as the Labour government, now under Chancellor John Healey, prepares to implement changes first announced by his predecessor Rachel Reeves.
How the 67% Tax Exposure Arises
The new rules will bring most unused pension funds and death benefits into an individual's estate for IHT purposes. Claritas Tax calculates that this could result in a 40 per cent IHT charge on the pension's value, plus a 45 per cent income tax on the remaining balance, creating a combined exposure of up to 67 per cent for those with significant pension wealth.
Adam Keates, associate partner at Claritas Tax, explained: “There is no silver bullet for wealthy individuals with well-funded pensions. Reducing the future IHT exposure may mean drawing money from a pension and triggering income tax during their lifetime. That could still be attractive compared with a potential combined tax exposure of up to 67 per cent at death.”
Strategic Review Urged Before April 2027
Keates emphasised that the traditional approach of preserving pensions and spending other assets first may no longer be suitable for everyone. “Those with significant pension wealth should review their retirement and estate-planning strategy before April 2027,” he advised.
He cautioned against making tax the sole driver of financial decisions: “Tax should not be the sole driving factor of any financial decision making; 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.”
Impact on Retirement Planning
The changes, which were part of the previous Chancellor's Budget, are now set to be inherited by Mr Healey, who has taken up the role at Number 11 Downing Street. For high net worth individuals, this means a fundamental reassessment of how pensions are used in estate planning.
Keates noted that any decision must weigh the immediate income tax cost against future retirement needs and what happens to the funds once withdrawn. “The long-established approach of preserving a pension and spending other assets first may no longer be appropriate for everyone,” he said.
Next Steps for Affected Individuals
With less than a year before the rules take effect, Claritas Tax recommends that wealthy individuals with well-funded pensions seek professional advice to model different scenarios. Drawing down pension funds earlier could trigger income tax now but potentially reduce the overall tax burden at death, depending on individual circumstances.
The firm also highlights that the decision is not purely tax-driven; it should align with broader financial goals, including retirement income security and family succession plans. As the April 2027 deadline approaches, proactive planning will be essential to mitigate the impact of these significant changes.
