The 75-Year Pension Cliff
Pension Drawdown Strategy and Inheritance Tax Planning After Age 75
For much of a person's working life, a pension is straightforwardly efficient. Contributions attract tax relief. Growth accumulates free of income and capital gains tax. And until recently, pension funds passed outside the taxable estate on death — making them one of the most powerful tools in long-term inheritance tax planning.
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That picture is changing. And for those who have structured their affairs around pension funds as a tax-efficient legacy vehicle, the change is material.
The Legislative Shift You Cannot Afford to Ignore
Following the Autumn Budget of October 2024, the government announced that defined contribution pension funds will be brought within the scope of inheritance tax from April 2027.
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If implemented as proposed, pension funds will no longer pass outside the taxable estate. They will instead form part of the donor's estate for IHT purposes, potentially subject to the standard 40% charge on amounts above the available nil-rate band.
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This is the most significant change to pension taxation in many years. It fundamentally alters the case for holding large pension funds as a legacy strategy — and it makes the question of how and when to draw from a pension considerably more complex than it was previously.
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The detail of implementation, and the transitional arrangements that will apply, remain subject to consultation and finalisation. Independent advice based on your specific circumstances is essential before making any changes to your arrangements.
What Changes After Age 75
Separate from the proposed legislative change, there are structural features of pension taxation that have applied after age 75 for some time and which remain relevant to drawdown planning.
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Before age 75, an individual who dies with uncrystallised pension funds can pass those funds to nominated beneficiaries free of income tax — though they may still fall within the estate for IHT purposes under the post-2027 rules. After age 75, withdrawals from a pension — whether taken by the original member during their lifetime or by beneficiaries following death — are taxed as income at the recipient's marginal rate.
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This creates a layered tax exposure for individuals who reach age 75 with significant undrawn pension funds:
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The fund may be subject to inheritance tax as part of the estate (from April 2027 if current proposals proceed).
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Withdrawals by beneficiaries after death will be taxed as income at their marginal rate.
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Where a beneficiary is a higher or additional rate taxpayer, the combined effect can be substantial.
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The interaction between these two layers — estate-level inheritance tax and income tax on withdrawals — is the core of what is sometimes called the pension cliff. Understanding it is the starting point for any meaningful drawdown or estate planning strategy.
Rethinking the Role of a Pension Fund
For those approaching or past age 75 with significant pension assets, the question is no longer simply how to maximise pension growth. It becomes a question of sequencing: what to draw, when to draw it, and how to reposition assets in a way that is efficient across both income tax and inheritance tax.
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There is no single answer. The right approach depends on the size of the fund, the individual's income requirements, the tax position of intended beneficiaries, and the other assets held within the estate. But the broad areas worth considering include:
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Phased Drawdown
Taking pension income in a structured way during lifetime, at a rate and in years that minimise income tax, and redirecting those funds into structures that sit more efficiently for IHT purposes.
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Gifting From Drawn Pension Income
Income drawn from a pension may, in appropriate circumstances, be gifted under the normal expenditure out of income exemption, provided it meets the qualifying conditions. This is a technically specific area that requires careful structuring and record-keeping.
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Business Property Relief and Alternative Assets
Certain qualifying investments may attract relief from inheritance tax and may be worth considering as part of a broader repositioning strategy. Our guide to Business Relief explains how this relief operates and the qualifying conditions that apply.
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Agricultural Property and Pension Interaction
Where an estate includes agricultural assets alongside pension funds, the interaction between agricultural property relief and the proposed pension changes requires careful consideration. Our guide to Agricultural Relief and Pensions addresses this directly.
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Pension Tax Relief in the Planning Context
Understanding how tax relief applies to pension contributions remains relevant even at this stage, particularly where income is being drawn and partially recycled. Our guide to Pension Tax Relief provides further detail.
The Cost of a Passive Approach
The families who face the most significant tax exposure are not always those with the largest estates. They are often those who structured their affairs effectively at an earlier stage — maximising pension contributions, holding funds outside the estate — and then did not revisit those arrangements as the legislative and personal context changed.
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A pension fund that was an efficient planning vehicle ten years ago may now require a fundamentally different approach. The proposed April 2027 changes make this a matter of some urgency for anyone with significant undrawn pension assets.
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The appropriate time to review is before the legislative change takes effect — not after it.
How Wills, Tax & Trusts Ltd. Can Help
Ray L. Best and the team at Wills, Tax & Trusts Ltd. work with individuals and families whose estates include significant pension assets, helping them understand their current position and identify the planning steps most appropriate to their circumstances.
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This begins with a clear-eyed assessment of the pension fund, the wider estate, the anticipated tax exposure and the options available. From that starting point, we help clients develop a structured approach — one that reflects both their income needs during their lifetime and their intentions for what they pass on.
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The conversation does not need to be complex. But it does need to happen.