Some bereaved families could face a tax charge of up to 91 per cent on inherited pension funds once unspent pension pots are brought within the scope of inheritance tax (IHT) from April 2027, according to analysis by NFU Mutual.

The calculations revealed that in extreme cases families could be hit by a triple tax charge.

Some families in Scotland could be even worse off, facing a maximum 93 per cent tax charge, due to the separate tax system where the top rate of income tax is 48 per cent.

Under the current UK IHT rules, pensions are not included in calculations. However, that is set to change next April after the Finance Bill received Royal Assent earlier this year.

IHT is charged at 40 per cent on assets above the available allowances, although a married couple can pass on up to £1m tax free in 2026-27 if they leave a qualifying home to direct descendants and qualify for the full residence nil rate band.

However, NFU Mutual explained the additional property allowance is gradually reduced for estates worth more than £2m and can be lost entirely.

Furthermore, inherited pensions are generally free of income tax if the pension holder dies before age 75. If the holder dies aged 75 or over, withdrawals are taxed at the beneficiary's marginal income tax rate.

NFU Mutual gave the example of a married couple with combined assets of £2m and pensions of £700,000, who left their estate to the survivor on first death and subsequently to their children.

NFU Mutual calculated that bringing the £700,000 pension into the scope of IHT would increase the family's IHT bill from £400,000 to £820,000, an additional charge of £420,000 equivalent to 60 per cent of the pension's value.

If the pension holder died after age 75 and beneficiaries paid income tax at 45 per cent on withdrawals, a further £219,326 tax charge would arise, taking the total tax burden linked to the pension to £639,326, or 91.3 per cent of the fund.

Commenting on the analysis, NFU Mutual chartered financial planner, Sean McCann, said: “The changes from April mean some families will be hit with a triple tax blow, through a combination of inheritance tax on the pension, loss of the tax break on the family home and additional income tax if their loved one dies after age 75.

Savers can take steps to mitigate the impact, McCann explained, including taking their tax-free lump sum before age 75, which will avoid an additional income tax charge.

“We expect to see more people taking regular income from their pensions making use of the unlimited ‘gifts from normal expenditure’ exemption," he said.

He added that before deciding to make big changes, savers should take advice to ensure that, “in a rush to avoid the worst of April’s tax changes,” they don’t compromise their future financial security.

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