Should I gift a lump sum from my pension to family? IHT concerns raise new questions

From 6 April 2027, most unspent pension funds and death benefits will be brought within the scope of Inheritance Tax for the first time.

This is a significant change from the current position, where a pension typically sits outside your estate and it has understandably prompted many individuals to consider whether gifting a lump sum from their pension now would be a sensible way to reduce their family's future IHT bill.

What is changing from 2027

Most defined contribution pots, including SIPPs and funds already in drawdown, will be included in your estate for IHT purposes.

Pensions left to a surviving spouse or civil partner remain exempt and certain benefits, including death in service payments and dependants' scheme pensions from defined benefit arrangements, are expected to stay outside the new charge.

Further guidance from HMRC is expected through the rest of 2026 and the detail continues to evolve.

The lump sum route and its limits

You can normally take up to 25 per cent of your pension tax-free, up to a maximum of £268,275, a figure that only becomes a constraint for those with pension pots above £1,073,100.

Anything withdrawn beyond your tax-free entitlement is taxed as income at your marginal rate. This means a large lump sum, gifted with the intention of reducing an IHT bill, can trigger a substantial income tax charge in the year it is taken, which may outweigh the IHT saved.

If you are going to make a gift of a lump sum, to avoid the implications of the changes to pensions next year, you need to take the following into account:

• Potentially exempt transfers – Most gifts become fully exempt from IHT if you survive seven years, with tapered relief available from the third year onwards.
• Annual exemptions – You can gift up to £3,000 each tax year immediately free of IHT, plus £250 to any number of individuals, provided they have not already received the annual exemption.
• Gifts from surplus income – Regular gifts made from surplus income, rather than capital, can be immediately exempt from IHT with no upper limit, provided they do not reduce your standard of living.

It is also worth noting that gifting a pension lump sum in the final months of life does not automatically remove it from your estate for IHT purposes.

Gifts made with plenty of time to spare, as part of a considered plan, are generally far more effective than those made in a hurry.

Care needs consideration

If you do plan to make a significant gift to your family in later life, it is important to also seek advice on your care needs.

If, at some point, you require care provided by a local authority, large gifts can be considered under the deprivation of asset rules that are applied when seeking public funding for your care needs.

This may mean that funding could be withdrawn where a council feels that your gifts were intended to avoid you paying privately for care.

Balancing IHT planning against your own security

Gifting away pension wealth too early can leave you exposed if your own circumstances change, particularly given rising life expectancy and the cost of later-life care.

Any decision should sit within a full review of your estate, rather than being taken in isolation and given the complexity of the 2027 changes and the guidance still to come, professional advice is essential before acting.

How can we help 

The upcoming pension inheritance tax changes are prompting many individuals and families to reassess how pension wealth fits into their long-term estate planning strategy. While gifting can provide opportunities to reduce future Inheritance Tax liabilities, decisions should be carefully balanced against retirement income needs, potential Income Tax consequences and broader family objectives.

To understand how the 2027 pension IHT changes could affect your estate or whether gifting from your pension makes sense for your circumstances, please speak to our specialists at Lubbock Fine Wealth Management.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. The information included in this article may be subject to changes in taxation following its publication. This article is intended for informational purposes only and does not constitute advice. The Financial Conduct Authority does not regulate estate planning.

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