Retirees pull out record £5 billion from pension in Q1 – what might investors consider?

672,000 people withdrew a record £5 billion out of their pensions in the first three months of 2025 – 24% more than over the same period in 2024, according to HMRC.

Many believe this is linked to the forthcoming changes to the taxation of pensions: from April 2027, unspent pensions will form part of one’s estate on death and potentially attract inheritance tax (IHT).

As a result, thousands more are expected to be dragged into the inheritance tax net – the Treasury anticipates raising an extra £1.5 billion a year from this by 2028/29. And the taxation wouldn’t end there. For pension beneficiaries of those over 75, IHT could come on top of income tax liability for withdrawals – combined, potentially an effective tax rate of up to 67% (see below).

With pensions coming under siege by the Treasury from April 2027, how could experienced investors mitigate the impact of IHT?

Some might opt to take money out of their pension and spend it, give it away (IHT free after seven years), or put it in trust (also IHT free after seven years). These options might help avoid a tax liability but also mean you would lose control of your money and be unable to use it should you need it.

Are there any alternatives?

This article discusses one option for experienced investors happy with the risks. IHT portfolios offer the potential for up to 100% IHT relief after two years (compared to seven years with other avenues of estate planning), alongside some growth above inflation and low volatility – not guaranteed. Importantly, should you need, you could take money out, though any withdrawals would no longer qualify for IHT relief.

If access is not a priority and you are comfortable with additional risks, the Enterprise Investment Scheme (EIS) and the Seed Enterprise Inbvestment Scheme (SEIS) also offer the potential for IHT relief plus income tax relief and capital gains tax breaks – when you invest in ambitious early-stage, and hence high-risk, companies.

Under current rules, pensions can be passed on very tax efficiently.

Broadly speaking, if you die before age 75, your remaining pension pot can usually be passed on completely tax-free. If you die after age 75, your beneficiaries may be subject to income tax on any income they take, but there is no IHT to pay.

The new rules, effective from 6 April 2027, will bring most unused pension funds and death benefits within the value of your estate for IHT purposes.

In addition, if you die after your 75th birthday, your beneficiaries' withdrawals from the pension could be subject to income tax at their marginal rate. When you take both income and inheritance tax into account, your loved ones could find themselves paying an effective tax rate of 67%. 

For those prepared to take greater investment risk, one way to shelter your wealth from IHT is to invest in unquoted IHT portfolios.

These invest in private companies that should be able to qualify for Business Property Relief (BPR) – and thereby IHT relief.

Please note, these investments are high risk and illiquid: you should ensure you fully understand the risks and not invest money you cannot afford to lose.

What is BPR?

In brief, BPR is a long-established tax relief originally set up for family businesses, but which could now also benefit investors in qualifying trading businesses.

Your investment should benefit from IHT relief after two years – provided the business remains BPR-qualifying and you still hold the shares (or a BPR-qualifying replacement) on death. Tax rules can change and benefits depend on circumstances.

Up to £1 million of BPR-qualifying assets (including private companies and agricultural property) can be passed on IHT free. The excess will still benefit from 50% IHT relief, meaning IHT will be applied at 20% rather than 40%.

How does the investment work?

IHT portfolios let you retain control of your wealth whilst shielding it from inheritance tax.

Technically, you invest in one or more companies – usually run by a specialist investment manager – that in turn own and operate several companies or projects.

The managers typically aim to give investors exposure to assets they believe can deliver some growth above inflation, with low volatility – not guaranteed.

After two years, the investment should qualify for IHT relief (compared to seven years with other avenues of estate planning).

If you need access to your money, you should be able to request a withdrawal, which will be processed subject to liquidity. Bear in mind, any money you withdraw will no longer benefit from IHT relief and any capital gain might create a tax liability.

EIS and SEIS investments should also qualify for IHT relief after two years, if you still hold them on death and they remain qualifying.

This is part of the generous tax package EIS and SEIS offer to temper the higher risks of investing in small young businesses – including up to 50% income tax and capital gains tax reliefs (SEIS) and up to 30% income tax relief and CGT deferral (EIS).

EIS and SEIS should not be used exclusively as an IHT planning tool - they are high-risk investments designed to target capital growth over preservation (not guaranteed). There also must be an exit for you to realise a return, meaning you cannot make a withdrawal if you require access to your investment.