There is a particular feeling when someone hands you a set of keys. It doesn’t matter whether it’s your first flat or a house you have worked 20 years to afford. The weight of metal in your palm means something: this is yours.
In the spring of 2014 George Osborne handed pension savers a set of keys. “Let me be clear — no one will have to buy an annuity,” he told the Commons. Your pension pot, he said, was yours. You could withdraw it as you chose, invest it as you wished and, from April 2015, pass it to your children without the punitive 55 per cent death charge that had previously applied.
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Millions of people reorganised their retirement around that promise. They stayed invested, taking income from their pot as they wished instead of buying annuities — insurance products that guaranteed you a set income in return for a lump sum. They treated their pension as a family asset, something to be preserved, grown and inherited.
Financial advisers built strategies around the new architecture. I helped clients do exactly that — turning what had been a one-way income stream into a multigenerational asset. By 2023, the last year for which data is available, more than £70 billion of pension income had been accessed flexibly since 2015, according to HMRC. The keys worked. People moved in.
Twelve years later, the locks are being changed.
The double tax problem
From April 2027, the government plans to bring pension funds into the value of a person’s estate for inheritance tax purposes. The Treasury’s rationale is that pensions should fund retirement income, not serve as a wealth-transfer vehicle. The government calls it closing a loophole. Most of the people affected would call it something else.
When someone dies after age 75 with a pension pot in what is known as drawdown (where the holder leaves it invested but has started taking income from it), the beneficiary — typically a spouse or children — will pay income tax on any withdrawals from that inherited pot. That isn’t changing. What changes in 2027 is that the same pot will now also count for inheritance tax purposes. The two taxes stack.
Take a £100,000 pension pot that is part of an estate that is large enough to be liable for inheritance tax. (You get a £325,000 inheritance tax-free allowance — £500,000 if your estate is worth less than £2 million and you leave your main home to a direct descendant.) If the pot is left to anyone other than a spouse or civil partner (who do not pay inheritance tax) then 40 per cent tax on it will wipe out £40,000. If the recipient of the remaining £60,000 is a higher-rate taxpayer, who pays 40 per cent income tax on withdrawals, then another £24,000 is taken. Of £100,000 the family keeps £36,000 — an effective tax rate of 64 per cent.
For additional-rate taxpayers inheriting from estates worth more than £2 million, which get smaller inheritance tax-free allowances, the combined tax rate could be close to 87 per cent in extreme cases.
A protest petition sent to parliament labelling this “double taxation” has attracted 10,000 signatures, and the description is hard to dispute. No chancellor would dare announce a standalone tax rate this high — spread across two mechanisms, it slips through without a speech.
The defence that falls apart
The Treasury says that pensions should fund retirement, not inheritance , yet the government’s own data makes the argument collapse, because the amount of time we spend in retirement is shrinking.
Healthy life expectancy (the number of years you live in good health) at birth is now 60.7 years for men and 60.9 for women, according to the Office for National Statistics. Both figures are the lowest since that data was first collected in 2011. In Scotland the figure for men drops to 59.1 years and in Wales women can expect 58.5 years of good health.
The average life expectancy, in any state of health, is 79.1 years for men and 82.7 years for women. The state pension age, meanwhile, is climbing from 66 to 67 by March 2028.
Place those numbers side by side. British men can expect nearly 61 years in good health but can’t have their pension until 67. That is a six-year gap, and it is widening. For a Scottish man, it’s nearly eight years.
The government’s target is that people should spend “up to a third of adult life” in retirement. A man reaching 67 with a life expectancy of 79 gets 12 years.
A question of trust
For those with estates worth less than the inheritance tax thresholds, the practical impact is limited. The income tax treatment on death after 75 remains the same. These new rules bite hardest on estates that are already liable for inheritance tax, and the pension pushes them further into that liability.
This creates a different question: whether a pension remains the right vehicle for wealth that can’t be spent in retirement. Insurance, gifting strategies and trust structures all look more attractive than they did 12 months ago.
Beneath it all sits a more fundamental problem — trust. Pension policy in Britain has changed direction so many times that building a 30-year plan requires a faith in political consistency that no living adult has witnessed. The lifetime allowance was introduced, raised, frozen, cut and abolished, all within 18 years. I have clients who ask me, only half joking, whether it’s worth planning at all when the rules might change again before they retire.
Pension freedom was granted with a standing ovation and is now being dismantled through the tax code, one budget at a time. When Osborne stood at the dispatch box, he handed millions of savers what felt like ownership.
Twelve years on, the pension is still technically yours. You can access it, draw from it, invest within it, but the terms have changed so fundamentally that the original promise has been hollowed out.
Jessica Cook is a partner in a financial planning firm