You’ve worked hard, saved diligently, and built a pension pot that should support you and your loved ones. But here’s the catch, without the right planning, up to 67% of your pension could be lost to taxes before your family even sees a penny. Shocking, right?
The UK pension system is built for those living in the UK, but expats often face unexpected tax traps when it comes to passing on their pensions. While UK residents have multiple ways to manage their inheritance tax exposure, expats could find themselves with fewer choices and bigger tax bills.
So, what’s the issue? How your pension is transferred after death. Some providers don’t offer survivor’s pensions, meaning your loved ones could be left with a lump sum payout and the UK taxman waiting with open arms.
I’m Nathaniel Jacobs, a financial adviser at Cameron James, a pension transfer company trusted by UK and international residents in over 35 countries. Today, let’s break down how you can protect your pension from unnecessary taxes and keep more of your hard-earned savings where they belong – with your family.
The Hidden Tax Problem
For British citizens living abroad, understanding the pension inheritance rules remains important for effective estate planning. The current framework offers several advantages:
- UK pension funds remain exempt from Inheritance Tax (IHT) until April 2027
- Funds maintained within pension structures can be passed on tax-efficiently
- Spousal transfers benefit from complete IHT exemption
However, there’s a big catch, as some pension providers don’t allow survivor pensions. Instead, they force a lump sum payout, which can create a massive tax liability for your beneficiaries.
The Lump Sum Problem Explained
When a pension provider forces payment as a lump sum rather than offering continued pension benefits to survivors, two tax issues emerge:
- The lump sum payment may face taxation at the beneficiary’s marginal income tax rate
- From 2027, lump sums left to non-spouse beneficiaries could also attract UK IHT at 40%
This creates a particularly challenging situation for British expats, as the protective trust structure of UK pensions dissolves once funds leave the pension environment.
What Does This Mean for Your Beneficiaries?
Let’s say you have a £1 million pension.
Scenario A: Pension remains within a pension structure
- Spouse inherits with no IHT liability
- Beneficiaries only face income tax on withdrawals if death occurs after age 75 (pre-2027)
Scenario B: Pension paid as a lump sum
- Non-spouse beneficiaries could face 40% IHT from 2027 (£400,000 on a £1M pension)
- The remaining £600,000 could then face income tax at the beneficiary’s rate (potentially another £270,000 at 45%)
- Final inheritance could be reduced to just £330,000
That’s a potential £670,000 tax bill on a £1 million pension!
Three Steps to Protect Your Pension Today
- Check your provider’s options: Does your current pension provider offer survivor’s pensions to non-UK residents?
- Review pension structure: Make sure your pension can remain within its tax-efficient structure after your death.
- Consider consolidation: Moving multiple pensions to a provider with flexible beneficiary options can eliminate forced lump sums.
Don’t let decades of pension savings disappear to avoidable taxes. A simple provider change could be the difference between your family receiving your full pension or just a third of it.
Don’t Wait Until It’s Too Late
Your pension represents years of hard work and careful planning, but failing to review your options could cost your family hundreds of thousands in taxes.
Book Your Complimentary Pension Protection Review Today
During this 30-minute consultation, we’ll:
- Assess your current pension arrangements for inheritance tax risks
- Identify whether your provider offers survivor pensions for expatriates
- Outline specific strategies to protect your pension from unnecessary taxation
- Provide clear, actionable steps tailored to your personal circumstances
Let’s make sure your retirement plan works for you and your family.
Disclaimer: This information is based on UK tax rules as of March 2025. Tax legislation can change, and individual circumstances vary. Please seek professional advice before making decisions about pension arrangements.
