Unused Pension IHT? Drawdown Pension and Spend It Do Not Save/Invest It
Published / Last Updated on 04/03/2025
It is well documented now, after the shock of Rachel Reeves’ October 2024 Budget, that unused pension funds on death will be included in your estate for inheritance tax (IHT) calculation from April 2027.
- If you are married or in a civil partnership, there will be no IHT as gifts between spouses including pension funds will be free of IHT.
- If you are single or are a widow that has inherited pension funds, any unused pension funds on death will then be included in your estate calculation and subject to IHT.
What to do with the Pension Fund?
- If you are a higher rate or additional rate taxpayer, you will pay 40%/45% income tax if you drawdown on the pension fund and spend it but if you do not drawdown, you may pay 40% IHT so it is broadly tax net neutral.
- If you are a basis rate taxpayer, you will pay 20% income tax if you drawdown on the pension fund and spend it but if you do not drawdown, you may pay 40% IHT so it would appear to be more beneficial to draw down the fund and pay 20%.
- But, if you then save it/invest it and do not spend it, you will have paid 20%/40%/45% income tax and then you may also end up paying 40% IHT on top.
Therefore, we suggest you should drawdown and spend the pension fund or gift it. There is no point paying 40% inheritance tax on top of any income taxes already paid.
Let’s Compare:
- £30,000 X 20% income tax = net £24,000 (income tax £6,000). You do not spend it, you save/invest it and then you die. Inheritance tax at 40% on that £24k = £9,600 IHT. Total taxes paid £15,600.
- £30,000 is left in your pension fund = no income tax. You then die = £30,000 pension fund subject to inheritance tax 40% = £12,000 taxes paid.
There is no point paying income tax on drawing down from your pension fund only to save/invest and then pay 40% IHT.
You should spend what you draw down so only take out what you plan to spend or gift (remember gifts from normal income are immediately free of inheritance tax).
Also see: Drawdown and IHT Gifts
Talk to us about our ‘In Retirement, Inheritance Tax, Later Life and Care Planning Strategy Review’.
See: Later Life & Inheritance Tax Review
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