The new tax on inherited pensions is set to impact thousands of pensioners and their beneficiaries. As part of the first budget of the new UK government, significant changes are coming for those passing on private pensions. From 6 April 2027, private pensions will be included as part of a person’s estate for Inheritance Tax (IHT) purposes. This means pension funds will no longer be exempt from inheritance tax, leaving many families with a hefty financial burden.
How the New Inherited Pension Tax Works
Currently, private pensions do not fall under estate tax, allowing people to pass them on without inheritance tax in many cases. However, with the new pension tax rules:
- If the original pension holder dies before 75, their beneficiaries currently avoid inheritance tax. Under the new system, this will no longer be the case.
- From 2027 onward, inherited pensions will face a 40% inheritance tax, regardless of the age of death.
- Additionally, any withdrawals from an inherited pension will be subject to income tax, which can be as high as 45%.
This double tax on inherited pensions has sparked criticism, with many pensioners feeling penalized for saving responsibly.
Who Will Be Affected by the New Tax on Inherited Pensions?
While these changes won’t impact everyone, they disproportionately affect:
- Single pensioners who planned to pass their pensions to their children.
- Retirees who saved their pensions for inheritance, rather than spending them.
- Beneficiaries who inherit pension funds exceeding tax-free thresholds.
Notably, spouses and legal partners will still avoid inheritance tax on inherited pensions. However, children and other beneficiaries will be taxed heavily under the new system.
For example, if you inherit a £100,000 pension, you will:
- Immediately pay £40,000 in inheritance tax to HMRC, plus an additional income tax on every withdrawal you make after that.
- Pay up to 45% income tax on any withdrawals made later.
This has led many to rewrite their wills and seek alternative investment options to protect their pension savings.
What Are the Alternatives?
With the new tax on inherited pensions, pensioners are now looking at alternative retirement planning strategies. The State Pension Triple Lock, which ensures pension payments rise with inflation, remains uncertain due to its financial strain on the UK economy. Pension de-risking has already led to reduced growth in pension investments, and some UK pension funds have even started investing in Bitcoin—a highly volatile asset.
Given these uncertainties, transferring your UK pension fund to India through QROPS offers a stable and tax-efficient solution.
Why Transfer Your Pension to India Through QROPS?
If you have a UK pension and plan to retire in India, a QROPS transfer helps you avoid the new inheritance tax and provides greater financial security. Benefits include:
- No inheritance tax on pension funds in India.
- Higher returns through fixed-income investments and market-linked schemes.
- No forced de-risking, ensuring your pension fund continues to grow.
- More control over your pension investments, without unexpected government changes.
With UK pension policies becoming increasingly restrictive, transferring your pension through QROPS ensures you keep more of your hard-earned money, instead of losing it to double taxation.