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The earliest a person can access their private and workplace pensions is normally 55 (rising to 57 in April 2028). Your clients will usually be able to take the first 25% of their total pension pot as a tax-free lump sum, capped at a total of £268,275.
According to MoneyWeek, the number of people taking their tax-free pension lump sum as soon as they’re eligible to do so has hit a five-year high. One key driver of this rush to spend pension wealth is the upcoming changes to Inheritance Tax (IHT) rules.
Currently, most pensions are exempt from IHT, making them an effective tool for passing on wealth tax-efficiently. However, from April 2027, most unused pensions will fall within the scope of IHT, which is generally charged at 40%.
That’s why more people are spending their pensions as soon as they can – to reduce a potential IHT bill for their loved ones.
Unfortunately, if your clients access their pensions without considering the long-term financial implications, this could have unintended consequences, such as leaving them short of money in retirement. Moreover, once they take money from their pension, it’s difficult to put back.
As such, it’s crucial that your clients seek financial advice before touching their pensions. Here are two reasons why.
1. Avoid triggering high Income Tax charges
Beyond the initial 25% tax-free lump sum, pension withdrawals are treated as taxable income. So, if your clients take out too much too quickly, this may trigger Income Tax charges that could exceed the standard 40% IHT rate they’re trying to avoid.
This is because withdrawing large amounts might increase their total income enough to push them into a higher tax bracket. Any portion of their income that exceeds the higher-rate or additional-rate thresholds will be taxed at 40% and 45%, respectively.
Furthermore, if your clients’ income rises above £100,000 a year, they’ll start to lose their Personal Allowance (the amount a person can earn before paying Income Tax). This reduces by £1 for every £2 of adjusted net income over the threshold and becomes zero at £125,140. As a result, their overall tax liability will increase.
There’s also the risk of HMRC applying an emergency tax code if your client takes a large lump sum from their pension for the first time, meaning they have to pay more tax upfront than necessary. While your client can claim a refund, this tax charge could cause cashflow problems and financial strain over the short- to medium-term.
How a financial planner can help:
- Ensure your clients understand the Income Tax implications of withdrawing from their pensions, allowing them to make informed decisions.
- Review your clients’ finances as a whole and help them build a tax-efficient, sustainable income.
- Use cashflow modelling to test different scenarios so your clients can understand the tax impact before acting.
2. Plan pension withdrawals to support long-term financial security
Your clients might feel that taking a large lump sum from their pension and keeping it somewhere that’s easy to access provides a welcome safety net. However, once this money is sitting in a bank or investment account, it’s likely to be much easier to spend than when it was locked away in a pension.
Without a clear financial plan in place, your clients might overestimate how much they can safely withdraw, potentially leading to a shortfall later in life.
Indeed, research published by Pensions Age reveals that 80% of people aged over 50 are putting their retirement plans at risk by underestimating their life expectancy – and therefore, how long their money needs to last.
How a financial planner can help:
- Create a sustainable withdrawal strategy, so your clients only take what they need and leave the rest invested, allowing it to potentially grow in a tax-free environment.
- Use cashflow modelling to show how long your clients’ money could last in different circumstances and create a structured plan in line with their goals.
- Encourage decisions based on cashflow and goals, rather than emotions that may be triggered by events such as changes to IHT rules.
If your clients are concerned about Inheritance Tax on pensions, we can help
Spending pension wealth earlier in retirement might seem like an appealing way to mitigate the upcoming legislative changes. However, it’s not the only option for reducing a potential IHT bill.
We can help your clients explore a range of strategies that could allow them to pass on more of their wealth to the next generation, such as:
- Using IHT allowances and exemptions to gift wealth strategically during their lifetime
- Taking out life insurance and placing it in a trust to provide beneficiaries with funds to pay any IHT due
- Including charitable donations in their will, which could reduce the rate of IHT payable
- Setting up trusts, where appropriate.
Get in touch
If you have clients who are concerned about the upcoming changes to Inheritance Tax on pensions, we can help them review and update their retirement and estate plans.
Please get in touch by emailing hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts, or will writing.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
Approved by Best Practice IFA Group Ltd on 21/5/2026