7 million withdraw cash from pension pots since changes to inherited pensions in the budget

Following the October 2024 budget, inherited pensions will be included within the estate for Inheritance purposes from 6 April 2027. As such, there has been an influx in the number of taxpayers extracting their tax free lump sum allowances, which would not be transferred to their beneficiaries upon their death.

This is not however a ‘one size fits all solution’. When considering whether you should do the same, you should be mindful of the fact that if someone dies before the age of 75, their pension can be inherited Income Tax free by their beneficiaries. In this case, unless you plan to spend the tax free draw down, there is no tax benefit in extracting it before you die, only to put the funds in a savings account (for example) which still suffers Inheritance Tax.

If you are over 75 already, it is worthwhile considering what rate of Income Tax you pay in comparison to your children. If you pay tax at a lower marginal rate, then you may be better off drawing your pension and then onward gifting the sums not needed each year as regular gifts out of income. This could have both Income Tax and Inheritance Tax benefits. If your children pay a lower marginal rate of Income Tax than you then the position is less clear cut. 

Aside from the tax however, it is extremely important to consider whether you, or a surviving spouse, might actually need those funds to live on. Tax should not be the main driver, financial security is just as, if not more, important.

You should also consider how your pension is performing. If it is doing well, do you really want to extract all the funds from a profitable investment? You could potentially lose more over time in lost investments by moving your funds to an ISA, for example, where the return is significantly lower.

If you would like to discuss your pension position, inherited pensions, or your current Inheritance Tax exposure generally in more detail, please contact Gemma Hedges on 023 8046 1259 or email Gemma Hedges.