Could Your Pension Face a 91% Tax Hit? What You Need to Know

The landscape of retirement planning is shifting, and a recent change in the rules could have a significant impact on how you pass on your wealth. A recent article from This Is Money [1] suggests that some pensions could be taxed at up to 91% upon death, causing alarm among many savers. But is the situation as dire as it seems, and what steps can you take to protect your hard-earned savings?

The New Inheritance Tax Rules Explained

Historically, pensions have been one of the most tax-efficient ways to save for the future. Not only do you receive tax relief on your contributions, but unspent pension pots passed on at death have traditionally fallen outside of your estate for inheritance tax (IHT) purposes.

However, changes announced in the Autumn Budget mean that from April 2027, unspent pension pots will be considered part of your estate for inheritance tax. This Is Money claims this creates a “tax blind spot” that could strip families of hundreds of thousands of pounds.

The concern arises from a potential triple whammy of taxation:

• Inheritance Tax: If your total estate (now including your pension) exceeds the tax-free thresholds, it will be subject to a 40% inheritance tax.
• Income Tax: If you die after the age of 75, your beneficiaries will also have to pay income tax on any withdrawals they make from the inherited pension pot, at their marginal rate.
• Loss of Allowances: Adding the value of a pension pot to an estate could push the total value over the £2 million threshold, at which point the residence nil-rate band (an additional tax-free allowance for passing on a family home) begins to be withdrawn.

Fact-Checking the “91% Tax” Claim

While the changes are significant, it is important to approach the “91% tax” headline with caution. This Is Money is an opinion-led publication, and such figures are often based on extreme, worst-case scenarios.

The 91% figure assumes a very specific set of circumstances: a married couple with a large estate already on the cusp of the £2 million threshold, who die after the age of 75, and whose beneficiaries immediately withdraw the entire pension pot, pushing them into the highest 45% income tax bracket.

“For the vast majority of people who do end up leaving an estate that will be subject to inheritance tax, the effective tax rate will be considerably lower — so although it might not mean 91% of your estate will go to the taxman, it still makes sense to check whether the changes will impact your family.”

For the vast majority of people, the effective tax rate will be considerably lower. Furthermore, the statistics show that the average UK household wealth is far below these thresholds. According to The Money Charity, the average UK house price is £271,000 [2], meaning most estates will not trigger the complex interplay of lost allowances that leads to the 91% figure.

Protecting Your Wealth: Strategic Planning

Despite the sensational headlines, the core message is valid: the rules are changing, and your retirement strategy may need to adapt. Holding onto a pension solely for inheritance tax purposes may no longer be the most efficient approach.

Consider these strategies:

• Review Your Withdrawals: It may be more beneficial to spend your pension during your lifetime and preserve other savings, such as ISAs, which are not subject to the double taxation risk upon death.
• Consider the Tax-Free Lump Sum: Taking your 25% tax-free lump sum before age 75 could reduce the income tax burden on your beneficiaries.
• Gifting: Making regular gifts from your surplus income, or using your annual gifting allowances, can help reduce the overall size of your estate.

Navigating these changes requires a clear head and a personalised approach. The new rules are complex, and the right strategy will depend entirely on your individual circumstances, the size of your estate, and your goals for your family.

Think clearly. Break through the jargon.

References

1. This Is Money. “Your pension could soon be taxed at 91% on death – this is what you can do now to protect yourself.”
2. The Money Charity. “The Money Stats – July 2026.”