How can my children avoid paying inheritance tax on my pension?

In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk. Question: I am aged 77 and widowed. I am concerned that, after next year, if I die, my children will pay a lot of tax on my pension. It doesn’t seem fair that I have saved all my life and my family will have to pay inheritance tax on my savings and now my pension. Is there anything I can do? Answer: It’s completely understandable to feel frustrated about this. You’ve spent years building up your savings, doing exactly what you were encouraged to do, so it is unsettling to think your children could face a significant tax bill on top of everything else. Shorts You’re also right to be looking ahead, because the rules around pensions and inheritance tax are changing, and the timing is now quite clear. At the moment, pensions still sit outside of your estate for inheritance tax purposes. In most cases, the main tax your children would face is income tax when they draw the money. Because you are over 75, that would be at their marginal rate, which could be 20 per cent, 40 per cent or more depending on their circumstances. However, this position is due to change from April 2027. From that point, unused pension funds are expected to be brought into the inheritance tax net. That creates the possibility of two layers of tax. The pension could first be assessed for inheritance tax as part of your estate, and then, when your children draw from it, they would still pay income tax at their own rate. That is what is driving this sense that pensions may be taxed “twice”, and why many people in your situation are starting to revisit their plans. The key point is that pensions are still very good products. They have not suddenly become inefficient or something to avoid. But the way you use them may need to change. For many years, the common approach was to leave pensions untouched for as long as possible, drawing on other savings first. In some cases, that is no longer the most tax-efficient route, particularly if your estate may be subject to inheritance tax. What really matters now is thinking about how your money will be taxed across your lifetime and when it is eventually passed on. One of the most useful questions to ask is whose tax rate is likely to be lower. If you are currently a basic rate taxpayer, drawing some income from your pension could mean paying 20 per cent tax. If your children are working and paying higher rate tax, they may face 40 per cent later. In that situation, taking income yourself can actually reduce the overall tax paid across the family. Some people choose to do this gradually, drawing a little more than they need and either using it to support their lifestyle or passing some of it on during their lifetime. Gifting can be powerful, because money given away and survived for seven years will usually fall outside your estate for inheritance tax purposes. It also means rethinking which assets you spend first. If pensions may become subject to inheritance tax as well as income tax, it can make sense in some cases to draw from them earlier and preserve other savings. This turns the old “leave pensions until last” approach on its head. That said, there are important trade-offs. Drawing too much in one go could push you into a higher tax band, and you still need to ensure you have enough to support your own later life. Pensions also remain a tax-efficient environment while the money is invested, so it is about balance rather than simply emptying them. There isn’t a one-size-fits-all answer here. Your health, your income needs, the size of your estate, and your children’s tax positions will all influence the right approach. What is worth avoiding is doing nothing. With a known rule change coming in April 2027, this is a good moment to review your strategy rather than relying on old assumptions. A bit of forward planning now can make a meaningful difference. It can help you feel more comfortable about your own position and, importantly, increase the chances that more of what you’ve built up ends up in your children’s hands rather than being lost to tax.