Executive Summary: This article provides the definitive step-by-step mathematical proof of how a £1,000,000 pension can be reduced to just £100,000 for the family — an effective tax rate of 90%, not 87%. Using Mr Miggins (widower, 78, £2.7m estate) and daughter Amy (earning £100,000), it walks through three tax layers. The 87% figure widely cited in the press uses 45% income tax; the 90% figure reflects the 60% effective rate in the personal allowance taper band.
Mr Miggins leaves his daughter Amy a £1,000,000 pension. Amy receives £100,000. HMRC receives £900,000.
That is 90%. Not 87%. Ninety percent.
Here is exactly how that happens. Step by step. No jargon. Just the maths.
The Maths
Mr Miggins. Widower. Age 78. Dies 7 April 2027.
His estate:
- Defined contribution pension: £1,000,000
- ISA portfolio: £500,000
- Family home: £1,000,000
- Other assets: £200,000
- Total estate: £2,700,000
Amy earns £100,000 per year. She inherits the family home. Mr Miggins has 100% transferable nil rate band and residence nil rate band from Mrs Miggins.
Tax 1: Inheritance Tax at 40%
The pension is now inside the estate for IHT purposes. The estate already exceeds all available nil rate bands.
- IHT on the £1,000,000 pension at 40% = £400,000
- Remaining pension value: £600,000
Tax 2: The Residence Nil Rate Band Is Destroyed
This is the part most commentary misses entirely.
Mr Miggins’ estate is £2,700,000. The RNRB taper threshold is £2,000,000. His estate exceeds that threshold by £700,000.
The taper removes £1 of RNRB for every £2 above the threshold. That is £700,000 divided by 2 = £350,000 of RNRB removed.
Mr Miggins had his own RNRB of £175,000 plus Mrs Miggins’ transferable RNRB of £175,000. Combined RNRB: £350,000. The taper removes all of it. The combined residence nil rate band is completely wiped out.
Additional IHT caused by the loss of RNRB: £350,000 at 40% = £140,000
The Hidden Cost
The pension does not just attract 40% IHT on its own value. By pushing the estate further above the £2,000,000 threshold, it destroys £350,000 of RNRB that would otherwise have sheltered other assets from IHT. That is an additional £140,000 of tax caused by the pension being in the estate.
Tax 3: Income Tax at 60% on Amy’s Drawdown
Amy now has access to the remaining pension fund. She draws £25,000 per year.
Amy already earns £100,000. Her pension drawdown of £25,000 takes her total income to £125,000.
This falls squarely in the personal allowance taper band (£100,000 to £125,140). In this band, for every £2 of additional income, £1 of personal allowance is removed. The effect is a 60% marginal tax rate.
HMRC takes £15,000 of every £25,000 Amy draws. She keeps £10,000.
Over approximately 24 years of drawdown, the total income tax paid on the pension is approximately £360,000.
The Total
Complete Tax Calculation: Mr Miggins’ £1,000,000 Pension
- IHT on pension value at 40%: £400,000
- IHT cost of destroyed RNRB: £140,000
- Income tax on drawdown at 60%: £360,000
Where Does the “87%” Figure Come From?
The 87% figure that has been widely reported in the press uses 45% as the income tax rate — the additional rate that applies above £125,140.
But Amy does not pay 45%. She pays 60%. Because her income falls in the personal allowance taper band where the effective marginal rate is 60%, not 45%.
This is not an edge case. It is a very common outcome. Any beneficiary earning between £100,000 and £125,140 who draws down an inherited pension will face this 60% effective rate. And that describes a very large number of the children of successful baby boomers.
“But This Only Affects a Few Wealthy Families”
That is the line you will hear repeatedly. Here are the numbers.
- 200,000 to 300,000 individuals hold defined contribution pensions worth over £1,000,000
- 670,000+ homes in England and Wales are worth over £1,000,000
- 5,000+ ISA millionaires, with 42,000+ holding ISAs above £500,000 (Rathbones/HMRC 2023)
- A quarter of a million families have estates exceeding £2,000,000
- 1.7 million workers earn over £90,000 per year — successful boomers tend to have successful children
This is not a problem confined to the super-wealthy. It is a problem for ordinary successful families — families with a decent pension, a family home in the South East, and children who have done well in their own careers.
This Is Not Inevitable
The outcome described above depends entirely on individual facts. Not every family will face a 90% effective rate. Many will face less. Some will face more.
But every family approaching £2,000,000 in combined estate value needs to understand the collision of these three tax layers before April 2027. The interaction between pension IHT, the RNRB taper, and income tax on drawdown creates outcomes that are far worse than any single headline figure suggests.
Legitimate planning strategies exist. But they take time to implement. They require proper advice. And they must be in place before health or circumstances change.
Technical Reference
Key legislation: IHTA 1984 s8D and s8E (residence nil rate band and taper). IHTA 1984 s7 (rates of IHT). ITA 2007 s35 (personal allowance). Finance Bill 2025–26 (pension inclusion in IHT from April 2027).
60% marginal rate: Personal allowance is reduced by £1 for every £2 of income above £100,000. Between £100,000 and £125,140, the effective marginal rate is 60% (40% tax + 20% from loss of personal allowance).
RNRB taper: Complete wipeout occurs at £2,700,000 for a single person with transferred RNRB from a deceased spouse. For a couple with full transferable RNRB, the combined £350,000 is lost entirely once the estate exceeds £2,700,000.
Data sources: ISA millionaires: 5,000+ millionaires and 42,000+ above £500,000 (Rathbones/HMRC 2023).
External references:
HMRC: Income tax rates and personal allowances
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