What should I do with a large pension pot before the rules change?

Right now, IHT is charged at 40% on the value of your estate above certain thresholds. Everyone has a nil-rate band of £325,000. There’s also a residence nil-rate band of up to £175,000 if you leave your home to a direct descendant (like children or grandchildren).

So, in total, a married couple could potentially pass on up to £1 million tax-free, assuming they’re leaving a property to children and haven’t used any of their allowances elsewhere.

But it’s the assets over and above these thresholds, including pensions, once the rules change that could face the 40% tax. That’s where people with a large pension pot, a family home, and other savings may unexpectedly find themselves in the IHT net.

The phrase large pension pot is being thrown around a lot right now, but let’s be honest, it’s entirely subjective.

To some, £500,000 may seem like a huge amount. But for someone planning to retire at 55 and live into their 90s, it’s just the starting point of a decent retirement plan. I’ve worked with clients who’ve built up £1 million or more in their pensions. For some, that came from high-earning jobs. For others, it was simply the result of diligent saving and sensible investing over decades.

But here’s the issue: whether you consider your pot large or modest, if there’s money left in it when you die, particularly after these new rules come in, it could be taxed twice. That’s regardless of how carefully or fairly it was accumulated.

And if you’re planning to leave your pension to children or grandchildren, that tax bite could be significant.

This is where things start to feel counterintuitive. In theory, the simplest way to avoid IHT on your pension is… to spend it.

If there’s nothing left in the pot when you die, there’s no tax to pay. Sounds simple. But of course, real life is rarely that straightforward.

Some of my clients plan to retire at 75. If they’ve built up a large pension pot, they may struggle to spend it all in the remaining years of their life. Others may take early retirement at 55, meaning they need that pension to stretch over 30 or 40 years. In those cases, inflation could eat away at the value, and withdrawing too quickly could mean running out of money later on.

What’s frustrating for many people is that the government seems to be penalising exactly the kind of behaviour it used to encourage: saving well, planning ahead, and making responsible use of tax-efficient vehicles.

We may start to see people adjusting their plans, even leaving work earlier than they’d like, just to avoid growing their pension any further. I remember a similar shift during Covid, when a significant number of 50-somethings opted to exit the workforce. If continuing to work simply results in your pension being taxed when you die, why bother?

Here’s the real sting in the tail. If you die with a large pension pot after these new rules come into force, the tax impact on your family could be considerable.

First, the value of the pension will be counted as part of your estate, which could push it over the IHT threshold, triggering a 40% (IHT) bill on the amount above your available allowances. Then, when your beneficiaries access the remaining pension, they’ll likely have to pay income tax on it at their own marginal rate.

It’s a potential double hit, and a new level of complexity that simply didn’t exist before. For many, especially those who’ve saved carefully and consistently throughout their lives, it feels unfair.

That’s why it’s more important than ever to seek advice and model your retirement properly. We need to be looking not just at the next few years, but at what happens to your wealth after you’re gone.

Yes, and it’s something I’ve already started having conversations with clients about.

Some are choosing to draw down tax-free cash earlier than planned, concerned that future rule changes might restrict their access to it.

Others, particularly business owners and self-employed individuals, are reviewing whether continuing to contribute to pensions is still the best option for them, especially if they’re approaching the IHT threshold when other assets like property and investments are considered.

These are understandable reactions, but they also highlight the importance of personalised financial planning. Taking more from your pension than you need could reduce its long-term value. If your investments don’t grow as expected or you live longer than planned, there’s a risk of running out of money later in retirement.

Pensions remain a valuable tool for providing income in later life, and many people will continue to benefit from the flexibility and tax advantages they offer. But as the landscape shifts, it’s more important than ever to understand how all the pieces of your financial plan work together, from pensions and ISAs to property, gifting, and estate planning.

A review with a qualified adviser can help ensure your strategy still supports your long-term goals, for both your retirement and any legacy you hope to leave behind.

The list of options isn’t endless. But there are some things you can do, and the sooner you act, the better.

– Review your beneficiaries: Make sure your nomination forms are up to date. This won’t avoid IHT if the rules change, but it will ensure your wishes are clear and respected.

– Consider drawdown earlier: If it makes sense for your financial situation, gradually drawing down your pension could help reduce its size and spread your income over time. But this needs to be balanced carefully with inflation and longevity.

– Explore lifetime gifting: If you have other assets (e.g. ISAs, property), consider gifting some wealth during your lifetime, taking advantage of annual exemptions and the seven-year rule.

– Look at life insurance: For some clients, a life insurance policy held in trust can be used to offset potential IHT bills. It’s not for everyone, especially where health or premiums are a concern, but it’s worth exploring.

– Use cashflow modelling: This is something I do with all clients. It helps forecast your income needs, the likely size of your residual pot, and whether your loved ones are likely to face a tax bill. It takes guesswork out of the equation.

– Keep reviewing: Regular annual reviews are vital. We don’t know how the legislation will evolve, but planning based on what we know now gives you more control, not less.

The truth is, we’re all navigating shifting sands right now. Whether these proposed changes to pension tax rules go ahead, get watered down, or scrapped entirely, none of us can say for sure. But what we can do is plan.

If you’ve built up a large pension pot, now’s the time to ask yourself the big questions. Not just “Will I have enough for retirement?”, but “What happens to the money when I’m gone?”, and “Will the people I love actually benefit, or face a bill?”

Tax changes come and go. Governments change. Policies evolve. But the need to plan, protect, and provide for your family never goes away.

By understanding the rules (even if they may shift), reviewing your strategy, and having open conversations with your adviser, you can avoid knee-jerk decisions and create a plan that works for you now and into the future

If you’d like to talk through your options or understand what these changes might mean for your own large pension pot, speak to me or one of my colleagues. We’re here to help.