Wealthy retirees face soaring tax bills

High net worth individuals with large pension pots could see a combined income tax and inheritance tax burden of up to 67 percent once unused pensions are drawn into the scope of inheritance tax, according to a recent analysis by Claritas Tax.

New rules could push more estates into higher tax brackets

From April 2027, most unused pension funds and death benefits will be counted as part of an individual’s estate for inheritance tax purposes.

The government estimates that about 38,500 estates will face higher liabilities, with the average liability rising by roughly £34,000 for those affected.

Claritas Tax’s calculation assumes a 40 percent rate applied to the pension’s value and a 45 percent rate on any remaining balance.

Together, these rates could translate into a 67 percent combined tax exposure at death for some wealthy retirees.

Advisers suggest careful timing of withdrawals

Associate partner Adam Keates of Claritas Tax warned that there is no simple solution for wealthy individuals with well‑funded pensions.

He noted that drawing money from a pension during life would trigger income tax now, but might reduce the eventual burden.

Adam Keates said, “Reducing the future exposure may mean drawing money from a pension and triggering income tax during their lifetime.

That could still be attractive compared with a potential combined tax exposure of up to 67 percent at death,” Adam Keates added.

Adam Keates cautioned against emptying pensions indiscriminately.

He said, “Any decision must consider the immediate income tax cost, future retirement needs and what happens to the funds once they have been withdrawn.”

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Claritas Tax highlighted several planning options for those likely to be affected, including using pension withdrawals to make regular gifts from surplus income or reinvesting pension income in tax‑advantaged vehicles.

They also suggested potentially retiring abroad where double‑taxation agreements could alter the tax treatment of pension income.

The longstanding strategy of preserving a pension and spending other assets first may no longer suit every high‑net‑worth retiree.

Adam Keates said, “Those with significant pension wealth should review their retirement and estate‑planning strategy before April 2027.”

In practice, this mirrors earlier shifts when pension reforms forced retirees to reconsider how they accessed their savings.

The current change is similar in that it pushes individuals to balance immediate tax costs against longer‑term implications, rather than simply deferring withdrawals.

Adam Keates emphasized that tax should not be the sole driver of financial decisions.

He said, “The aim should not be to withdraw money solely to avoid tax, but to determine whether paying some income tax during their lifetime could produce a better overall outcome for them and their family as part of a wider strategy for succession and financial security.”

Financial and tax advisers are urged to engage with clients early, reviewing both retirement needs and estate‑planning goals before the new rules take effect.

The advice aims to help high‑net‑worth individuals manage their pension assets effectively.

This will help them preserve the intended benefits of their pension assets while dealing with the new tax rules.