How to avoid inheritance tax on your pension – and dodge scammers

People anxious about a future inheritance tax hit on pensions should stay on guard against scammers offering easy and appealing fixes, a finance expert has warned.

Money remaining in pension pots is going to become liable for death duties like other assets, such as property, savings and investments starting in spring 2027.

The announcement in last autumn’s Budget has prompted a stream of questions from This is Money readers asking how best to avoid the raid on their retirement savings – scroll down to find some legitimate options.

The legislation and communication around how the changes will work in practice is still vague, and savers may feel unsettled and unsure about whether to continue putting money into their pensions, according to St. James’s Place head of advice Claire Trott.

‘Some people may even be tempted to withdraw large sums from their pension out of fear their families will be hit with an inheritance tax bill in future,’ she says. 

‘This is particularly worrying as it can increase vulnerability to potential scams.’

 Will your family have to pay inheritance tax? Check the rules on who pays below

Trott says pension firms offer protection against scams, but after people take savings out their funds become more susceptible to fraud.

‘Those who withdraw funds with no real plan for what they are going to do with the money can find themselves at a higher risk too.

‘They may be approached by someone offering to take care of their cash, inheritance tax free, and while this may sound appealing, it could be a scam.’

She says that before making decisions about avoiding an inheritance tax bill, you should get guidance from a trusted source – such as the free Government-backed Money Helper or Pension Wise services – or consider getting a regulated financial adviser to guide you through the upcoming changes and how to manage your estate.

Trott adds that people younger than 55 should be particularly careful about pension scams.

‘If you do get approached by a company claiming to help you withdraw your pension early, chances are it will be a scam,’ she warns.

You can lose your entire fund in a so-called ‘pension liberation’ scam, and face a hefty tax charge on top for taking money from your pension before you are 55. HMRC will pursue you for this even if all your pension money has vanished already.

‘It isn’t illegal to access your pension before the age of 55, but it’s not recommended,’ says Trott. 

‘Not only does it significantly increase your risk of running out of money in retirement, but those who choose to withdraw early are also subject to a tax charge.

‘Early pension withdrawals are only permitted without an additional charge in two scenarios – those in ill health and those with a protected retirement age in careers such as sports or the military – and a reputable pension provider is unlikely to recommend withdrawing from your pension in any other circumstances.’

How to guard against pension fraud

Claire Trott offers the following tips to protect yourself from pension scammers.

Be wary of unsolicited calls: It’s important to remember that pension cold calling is illegal in the UK. If you receive a call from an unknown caller about your pension, it’s likely to be a scam, so do not share any personal information or move money out of your pension at their instruction.

Hang up or if you can get some information on them, for example their phone number and company name, report it to the Information Commissioner’s Office so they can take the necessary action.

Be cautious of emails, texts, or messages on social media offering ‘free pension reviews’ or ‘guaranteed returns’ too.

Don’t be rushed to take action: A tactic scammers often use is to pressure you to act quickly. Take your time to make decisions and consult with trusted advisers or family members before moving money from your pension.

Remember, a genuine adviser will give you time to consider and won’t rush you into a decision.

Stay alert for red flags: The following tactics are used often used by pension scammers, so if you see any of them, be aware as it could be a scam.

– Promises of ‘high or guaranteed returns’ or ‘overseas investments’.

– Schemes that seem too good to be true, which probably are.

– Requests to transfer your pension into a single investment, especially if you’re offered cashback or an upfront bonus.

Only use trusted sources: As a rule of thumb, government-backed services like Money Helper or Pension Wise are safe sources to use for pensions advice.

It may also be worth speaking to a regulated financial adviser who can guide you through the upcoming pension changes and how to manage your estate.

How do you avoid the looming inheritance tax raid on pensions?

Many savers with larger pensions are keen to avoid the new inheritance tax levy, and there are ways to do this legitimately – though some are more sensible than others, depending on your wealth and personal circumstances.

First off, consider consider if you really are likely to have a big enough estate to pay inheritance tax, especially after you have spent down your pensions and other assets during retirement.

Check the rules in the box further below, before you start worrying about your beneficiaries paying inheritance tax after you are gone. If you have cause for concern, consider the following options.

1. If you can afford it, you can spend or gift as much of your pensions as possible, while avoiding a big income tax bill.

Recent research showed many savers with larger pensions intend to spend them by splashing out on more holidays.

Bear in mind it is better to avoid crystallising losses by making bigger pension withdrawals in market downturns.

2. Consider gifting out of surplus income, which remains inheritance tax-free providing you can afford it.

We explain how to do this and prove to the taxman you are doing it from actual surplus income.

A This is Money reader explains how he is doing this to pass his wealth to his two daughters.

3. Look into buying life insurance and putting it in trust.

This can mean your loved ones get a payout straight after your death and free of inheritance tax – but you have to set it up correctly.

Here’s how to put life insurance into trust, but be aware that premiums can be high especially as you get older, and if you cancel a policy you immediately lose all the benefits of taking it out in the first place.

4. Leave more or all of your estate to your spouse, who can still benefit from estates free of inheritance tax, instead of your children to delay and minimise the eventual bill.

Wealth manager Evelyn Partners has suggested there could be a marriage boom or rise in civil partnerships among older couples as a result of the inheritance tax changes – read its six options to cut inheritance tax on pensions.

5. Buying an annuity is another option which Evelyn Partners explores.

Meanwhile, beware- although some people have raised the idea of siphoning pension funds into stocks and shares Isas, these are also liable for inheritance tax, and there are other pitfalls.

A financial planner from Quilter Cheviot explains how switching pensions into Isas can backfire.