Since the announcement that pensions are to be included in estates for inheritance tax (IHT) purposes the question of whether those with large pension pots should be giving some funds away has become increasingly common.

According to a recent AJ Bell survey, 62% of advisers have seen more clients specifically asking about the rules of gifting, and 84% have experienced more queries about estate planning.*

When it comes to tax-free cash the consensus is that it will make sense to take it by age 75 if pensions are included in the estate. Even if the money is not needed, there will only be IHT due on death, rather than IHT and then income tax for the beneficiary, which would be the case if the funds were left in the pension.

Although some of the benefit of withdrawing may be offset by the loss of tax-free compound growth which will be more pronounced the longer the client survives. More likely clients with large pots that don’t need the tax-free cash may look to gift directly to family as a potentially exempt transfer, or possibly put the cash into a trust.

When it comes to income the situation is a bit more nuanced. Regular gifts out of income can be made without having to worry about surviving seven years. The basics are that the gifts must be regular, from income and not impact the client’s standard of living. This means the client’s income needs must be met from income (not capital), before any excess can be given away. Good record keeping is essential should it be queried on their death.

Before the proposed rule change was announced, most advisers would recommend clients use other assets such as general investment accounts and ISAs first and use the pension last. I have seen commentary that this is now flipped on its head, and pensions should be used first to avoid the double-taxation on death post-75, but I’m not sure this is clear cut.

Pension income is taxable, so larger sums need to be withdrawn to meet a specific income target. This leaves less in the pension for the double tax for beneficiaries, but a larger ISA (or other) pot which still has IHT. If the client took income from ISA or GIA first, they would need to deplete these assets less as there’s no income tax on the withdrawals, so there would be a bigger estate left in total to be passed on.

If the beneficiary is likely to be the same rate taxpayer as the client, then it makes little difference. If the beneficiary pays income tax at a lower rate, then letting them pay tax, rather than the client paying a higher rate on their pension withdrawals, could still make sense. Paying higher (or additional) rate tax on excess withdrawals may also limit the attraction of making significant regular gifts out of income, but as ever each client will be different.

While it may be prudent to wait until we see the draft legislation (due this year), before making significant changes to planning, there is no doubt that the need for advice in this area will be greater than ever.

*Based on an online survey of 301 financial advisers carried out by AJ Bell between 14 March and 2 April 2025.

Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team.  Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster