Pay Advice Fees from Pension Fund Due to IHT on Pension Funds
Published / Last Updated on 11/07/2025
You may or may not be aware but unused pension funds on death will be included in your estate from April 2027 and therefore, potentially subject to inheritance tax. This is a major blow to all investors that had planned to build or have already built significant pension funds for their retirement with the plan to leave those funds tax efficiently to their loved ones.
Increase Regular Income from Flexible Access Drawdown
As you may expect, we have received many calls from clients now asking what the next course of action should be. One suggestion is to start making additional withdrawals on a regular basis (not ad-hoc withdrawals) from your pension fund to increase your regular income.
As part of UK Inheritance Tax laws, gifts from regular income to loved ones that do not reduce your standard of living are immediately outside your estate for IHT purposes. Yes, you may pay income taxes, and you should consider if your income tax bands are:
- 20% income tax is better than 40% IHT.
- 40% income tax is net neutral to 40% IHT.
- 45% income tax is worse than 40% IHT, so this may not be preferable but:
- In the longer term, any future growth that you may have had on your pension fund would potentially have made your estate and therefore, your IHT bill larger but if you have gifted those funds to loved ones (irrespective of your tax position) and loved have invested those funds, any future growth on the gift and invested by loved ones is not in your estate.
Excess Income over Expenses: On death, HMRC will check that you did make gifts from excess income to make gifts that are considered ‘gifts from normal income’ and immediately outside your estate for IHT. With HMRC’s IHT returns, there is a form IHT 403 page 8: “Gifts made as part of normal expenditure out of income”
See: https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf
- You need to keep accurate records for the last 8 years to demonstrate total Net Income less Expenditure to calculate and proof surplus income that you have then gifted (in excess of your £3,000 annual gifting exemption).
- You could even use the £3,000 annual gifting exemption plus any excess/surplus income gifts to fund a life insurance policy, placed in a trust for your loves ones that would also be free of inheritance taxes.
Lump Sum Death Benefit Allowance (LSDBA) Consideration
In addition, depending upon the age when you die, the amount remaining in your pension fund, may then be tax free for your loved ones to drawdown under the LSDBA (death before age 75) or if it is potentially subject to your loved ones own marginal rates of tax (death after age 75), they can control when they take beneficiary drawdown until say they are only nil rate or basic rate tax payers in retirement.
See: Pension IHT & LSDBA
Another Idea: Pay Financial Advice Fees and Ongoing Money MOT Service Fees from your Pension Fund
This will reduce your pension fund tax efficiently due to the following:
- If you pay our advice fees direct from your bank account, you are paying us from money that has already been taxed.
- If you pay our advice fees by deduction from your pension fund, it is not treated as a taxable withdrawal meaning you have indirectly had ‘tax relief’ on our fees.
Please do consider, where possible, paying your pension advice fees from your pension fund.
Talk to us about our ‘In Retirement, Inheritance Tax, Later Life and Care Planning Strategy Review’.
See: Later Life & Inheritance Tax Review
Other useful links:
