Is a Pension Still a Good Asset to Leave to Your Children?

Many parents worry that their pension will be a poor inheritance for their children, especially with recent headlines about inheritance tax and changing pension rules.

It’s an understandable concern.

The reality, however, is far more reassuring.

Even with future inheritance tax rules, a pension can still be one of the most effective and flexible assets to pass on to the next generation when appropriately structured.

This short guide explains the practicalities, without jargon or scare stories.

How Pensions Are Passed On

Most modern pensions allow you to nominate beneficiaries, such as your children or grandchildren.

On death, the pension does not usually have to be paid out as a single lump sum. Instead, beneficiaries can typically:

  • Keep the pension invested

  • Take income when they choose

  • Spread withdrawals over many years

  • Pass the remaining pension on again when they die

This flexibility is one of the pension’s biggest strengths.

What Tax Do Children Pay on an Inherited Pension?

Income tax depends on your age at death

  • If you die before age 75
    Your beneficiaries can usually take income tax-free

  • If you die after age 75
    Any withdrawals are taxed at the beneficiary’s own marginal income-tax rate

Crucially, there is no requirement for your children to take the money immediately. They can control when and how much they withdraw.

This allows taxes to be managed gradually, often at much lower rates than if the money were forced out all at once.

What about Inheritance Tax (from April 2027)?

From April 2027, unused pension funds are expected to fall within the scope of Inheritance Tax.

While this is an important change, it does not mean pensions suddenly become a “bad” inheritance.

Key points to keep in mind:

  • The pension has usually benefited from decades of tax-relieved growth

  • Income tax rules on death (before/after age 75) still apply

  • Beneficiaries can still spread withdrawals over time

  • In many cases, the overall tax outcome remains competitive compared to other assets

The focus moves from avoiding tax completely to managing tax sensibly over time.

“Wouldn’t an ISA Be Better for My Children?”

ISAs are excellent for flexibility during your lifetime, but they are not designed as long-term inheritance vehicles.

When a child inherits ISA money:

  • The ISA wrapper is lost

  • The money becomes part of their own taxable environment

  • Growth and income may be taxed year after year

By contrast, an inherited pension:

  • Can remain invested in a tax-advantaged environment

  • Allows income to be timed and controlled

  • Can be passed down again to the next generation

Even after inheritance tax, pensions often retain more long-term planning advantages than ISAs for beneficiaries.

Why Parents Often Underestimate Pensions as an Inheritance

Many concerns come from outdated assumptions, such as:

  • “My children will have to take all the money at once”

  • “They’ll pay huge tax immediately”

  • “The pension dies with me”

For most modern pensions, none of these are true.

With the right structure and beneficiary options in place, pensions can act as a long-term family wealth vehicle, not just a retirement income pot.

What Really Matters: Structure and Advice

Not all pensions are the same.

Key considerations include:

  • Does your pension allow full beneficiary drawdown?

  • Are nominations up to date?

  • How does the pension fit with your wider estate?

  • Should other assets (like ISAs) be spent first?

  • How might future tax rules affect your family?

This is where planning matters far more than the product itself.

The Ifamax View

At Ifamax Wealth Management, we don’t see pensions as “your money until retirement and then someone else’s problem”.

We plan pensions as part of a lifetime and intergenerational strategy — balancing:

  • Retirement income

  • Flexibility

  • Tax efficiency

  • And how wealth may support your family long after you’re gone

Even with changing rules, pensions remain a valuable, flexible and often sensible asset to pass on, when reviewed and structured properly.

 

Important note


Tax treatment depends on individual circumstances and pension scheme rules. Not all pensions offer full beneficiary drawdown. Professional advice is essential to ensure arrangements remain appropriate and aligned with your objectives.

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Ashton Chritchlow