The pros and cons of gifting pension wealth to your children
With unused pension pots set to become subject to Inheritance Tax (IHT) from 6 April 2027, you might be concerned that a higher tax bill will leave less to pass on to your children.
Under the new rules, calculations from AJ Bell suggest that an additional-rate taxpayer inheriting a £100,000 pension fund from someone who died at age 75 could end up with just £33,000 after paying IHT and Income Tax. Basic- and higher-rate taxpayers could receive £48,000 or £36,000, respectively.
You may already be confident your pension will provide enough income for a comfortable retirement, and therefore plan to leave any unspent pension funds to the next generation in your will. But considering the new rules, gifting from your pension fund during your lifetime could help your loved ones pay less tax when you pass away, while also giving their finances a boost earlier in life.
However, if you’re yet to access your pension or are planning to do so soon, it’s vital to consider the long-term consequences of giving pension funds away and ensure any gifts won’t leave you short of income in retirement. With IHT, Income Tax, investment returns, and your long-term goals to consider, gifting from your pension is likely to require careful planning.
Read on to explore the options for gifting funds from your pension, and what you need to consider before starting to withdraw your funds.
You can generally access your private pension from age 55
Although the State Pension Age is 66 – expected to rise to 67 between 2026 and 2028, and again to 68 between 2044 and 2046 – you may be able to access your private pension much sooner, if you haven’t already.
Since 2015, changes to pension flexibility rules have allowed some savers to start withdrawing funds from defined contribution (DC) schemes, also known as “money purchase pensions”, once they reach the normal minimum pension age (NMPA). As of 2025/26, the NMPA is 55. However, this will rise to 57 in April 2028.
As a result, IFA Magazine reports that 43% of flexible payments were taken by people under 60 over the past decade.
You could take a tax-free lump sum from your pension
Once you’ve reached the NMPA, you typically have the option to take up to 25% of your pension fund as a tax-free lump sum.
However, tax-free payments are capped. As of 2025/26, the Lump Sum Allowance (LSA) is £268,275 – so you may need to pay Income Tax if you exceed this threshold. You may have a higher LSA if you previously applied for Lifetime Allowance protection.
You do not need to take the full 25% in one payment. So, if you’re only planning on gifting a portion of your lump sum, it may be worth leaving the rest in your pension to continue growing.
3 cons of withdrawing funds from your pension before retirement
While your pension can seem like an appealing source of funds, particularly if you’re looking to support loved ones with large purchases in the short term, it’s important to consider how your overall retirement fund could be impacted.
1. Taking a lump sum from your pension now could mean you lose out on compound investment returns
When calculating whether you can afford to withdraw funds now and gift a portion of your pension, it’s important to consider the potential loss in growth.
For instance, if you drew part of your tax-free lump sum at 55 and gifted it to your child, your retirement fund could lose the value you withdraw and the potential compound investment returns this money could have gained.
As demonstrated by Fidelity International, if you had an £80,000 pension pot growing at 5% a year, and you took £20,000 as a tax-free lump sum, you could potentially miss out on an additional £11,000 in investment returns over a 10-year period.
Of course, these figures are just an example. Actual growth rates are likely to vary.
The bottom line is that a one-off withdrawal could actually affect your pension’s growth over many years. That’s why it is so important to decipher whether the gift is affordable before you act.
2. Withdrawing funds before retirement could limit your tax relief on ongoing contributions
You can generally tax-efficiently contribute up to the Annual Allowance each tax year, which is £60,000 a year as of 2025/26 – or up to 100% of your earnings, whichever is lower. This amount may be lower if you are a high earner.
You may be able to carry forward any unused Annual Allowance from the three previous tax years.
If you choose to take flexible payments from your pension for gifting purposes while still contributing to your pot, you could trigger the Money Purchase Annual Allowance (MPAA). This permanently reduces your Annual Allowance down to a fixed threshold – which, as of 2025/26, is just £10,000.
3. You could pay more Income Tax
Any funds you withdraw in excess of your tax-free lump sum are potentially subject to Income Tax at your marginal rate. As of 2025/26, the thresholds are:
| Tax bracket | Rate | Income | Personal Allowance |
| Basic rate | 20% | £12,571 –£50,270 | £12,570 |
| Higher rate | 40% | £50,271 – £100,000 | £12,570 |
| Higher rate | 40% | £100,001 –£125,140 | Reduces by £1 for every £2 your income exceeds £100,000 |
| Additional rate | 45% | Over £125,140 | £0 |
So, if you had already retired and taken your tax-free lump sum, funds you take out of your pension – even if you give them away immediately – could be taxed.
Additionally, if you’re considering funding gifts by taking higher regular payments from your pension, it’s important to be mindful of the Income Tax thresholds. Otherwise, you could risk accidentally falling into a higher tax bracket.
3 pros of gifting from a pension
Once you’ve decided on a tax-efficient way to draw from your pension, it’s important to plan how you’ll gift the funds to your loved ones to minimise your estate’s IHT liability.
1. Some financial gifts are exempt from Inheritance Tax
As of 2025/26, any financial gifts below the annual exemption of £3,000 a year generally won’t be included in your estate for IHT purposes.
You can carry any unused annual exemption over by one tax year and, if you’re married or in a civil partnership, both you and your spouse will get separate allowances. So, by carrying one year’s allowance over, a couple could gift up to £12,000 tax-free in a single year.
You can gift more money tax-efficiently as a wedding gift, with limits of £5,000 for your child, £2,500 for your grandchild or great-grandchild, and £1,000 for anyone else.
If you do want to give away a portion of your pension funds, you could potentially reduce your estate’s IHT receipts by a significant amount by making full use of your annual exemption and the wedding rules over several years.
2. Large gifts could potentially be exempt from Inheritance Tax
Provided you don’t pass away within seven years, gifts of over £3,000 may also be excluded from your estate for IHT. Remember, pensions will be included within your estate for IHT purposes from April 2027.
These gifts are normally treated as potentially exempt transfers (PETs) and could attract a lower rate of tax. The rate of IHT charged on the gift will depend on how soon you pass away after giving the gift:
- 40%, up to year three
- 32%, between years three and four
- 24%, between years four and five
- 16%, between years five and six
- 8%, between years six and seven.
Note that PETs will be the first part of your estate assessed against your tax-free nil-rate band, which is £325,000 as of 2025/26. So, you may not benefit from taper relief even if you do pass away within seven years.
After seven years, no IHT will be charged on your gift. While none of us can be sure of when we’ll pass away, by giving gifts earlier in life rather than in your will, you may reduce the chance of their value counting towards your nil-rate band for IHT.
3. You may be able to gift from your pension tax-free with regular payments
If you’re planning to retire soon, you may be able to reduce the IHT liability on your gifts by taking your regular pension income at a higher rate and spreading your gifts out across several regular payments.
These payments could be exempt from IHT if they meet the following three conditions:
- The gifts are used for normal expenditure, such as your child’s rent.
- The payments are taken from your income, such as regular pension withdrawals, investment returns, part-time employment, or savings interest.
- You still have enough income to continue your normal standard of living, without relying on savings to fund your usual lifestyle.
When you pass away, the onus will be on your beneficiary to prove that these gifts are exempt from IHT, so it’s important to keep detailed records to help them provide evidence if necessary.
Find out how I can help
The rules for drawing down your pension, and for giving gifts, are complicated and can change over time.
If you’re planning to gift money from your pension, it’s important to consider your tax-efficient options to minimise the impact of Income Tax and IHT on the gift, your estate, and your retirement funds.
Email Marnel.Stafford@fosterdenovo.com, or call 07305 970959 or 0207 469 2800, to find out more about how I can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits. You should seek advice to understand your options at retirement.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
