Double tax take? - Inherited pensions, income tax, inheritance tax (from April 2027) and death post age 75
09 November 2026The Budget at the end of October 2026 was relatively benign, with some further tax increases at one end of the spectrum, and a few giveaways at the other.
There were a few minor changes to pensions. One of note is that under previous rules, scheme administrators were required to pay tax-free death benefits to beneficiaries within two years of learning of the death of a member aged under 75. A tax charge applied after this point. This rule was withdrawn on 28 October 2026.
Inheritance tax to pension fund values inherited by a non-spouse / civil partner
With this noted, the planned pension change set for the new tax year, starting April 2027, will proceed, with the introduction and application of inheritance tax to pension fund values inherited by a non-spouse / civil partner. This change has been widely publicised.
However, this might not be the end of the story. So, what’s the position?
- Under current legislation, there is normally no tax charge on your money purchase pension fund on your death before the age of 75 (within maximum limits)
- On your death after the age of 75, death benefits will be taxed at the recipient’s highest marginal income tax rate, whether taken as a lump sum or as a regular income, although the recipient can defer drawing benefits
- Most inherited pension death benefits become subject to inheritance tax from April 2027 if not passed to a spouse/civil partner
- From April 2027, on death post age 75, both inheritance tax and income tax may be applied to pension benefits inherited by a non-spouse/civil partner; potentially a double tax position
For reference, you no longer have to purchase an annuity at age 75 with your pension savings
Double tax take?
The key point of this blog is the note in bold above: from April 2027, on death post age 75, both inheritance tax and income tax may be applied to pension benefits inherited by a non-spouse/civil partner. This could result in a double tax position.
This needs to be considered carefully if it affects you, and to be built into any overall inheritance strategy that you may have looking forward.
A good example of the potential effect of this change is that if your overall estate exceeds £2M with pension funds added in, the residence nil rate band (currently £175,000) reduces by £1 for every £2 over this limit. If this occurs, it might be suggested that this is a triple tax take.
Take individual advice
This new additional tax position can be complicated, therefore, taking your own individual advice is important in looking through your needs and circumstances to manage your overall funds into the future.
No individual advice is provided during this blog.
Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899
