Brought to you in partnership with SFC Capital
With unused pension funds set to fall within the scope of inheritance tax from April 2027, investors are being forced to rethink long-held assumptions about pensions as the ‘last pot to spend’. As more clients explore earlier drawdown strategies, Ed Prior, SFC’s Head of Investor Services at SFC Capital, explains how SEIS is emerging as a powerful tax-planning tool, helping to offset income tax on withdrawals while supporting broader intergenerational wealth planning.
The government plans to bring most unused pension funds and pension death benefits into the scope of Inheritance Tax (IHT) from 6 April 2027.
For many investors with sizeable defined contribution (DC) pension pots, this plan raises a straightforward question:
Do I leave more wealth inside the pension, or start drawing some of it out earlier and reposition it?
Historically, investors have treated pensions as the “last pot to spend”. If pensions become more exposed to IHT on death, that logic will shift. But drawing money out of a pension wrapper comes with an obvious catch: pension withdrawals are generally taxed as income. For higher and additional-rate taxpayers, that means a meaningful income tax bill in the year of withdrawal.
This is one of the reasons more investors are looking at the Seed Enterprise Investment Scheme (SEIS) as part of a broader, tax-aware strategy. SEIS isn’t for everyone, and it certainly isn’t a replacement for pensions. But it can be a useful tool to make withdrawing money out of a pension more tax-efficient—particularly where investors are trying to manage the income tax impact of drawing down.
What’s changing
Under the plan for 6 April 2027, many unused DC pension funds and pension death benefits will be treated as part of your estate for IHT purposes.
The practical implication is that a pension pot that was previously often viewed as relatively IHT-efficient could now face IHT. That is why more HNWIs and advisers are revisiting pension “drawdown timing” with clients—particularly those who have accumulated large DC pots and who are thinking about intergenerational wealth planning.
What this could mean in practice
For someone whose nil-rate bands are already fully used (for example, by a family home and other investments), a £500,000 pension pot could face up to £200,000 in inheritance tax.
The impact can also compound. The pension may face IHT on death, and if the pension holder dies after age 75, beneficiaries then pay income tax on withdrawals of the remaining funds at their marginal rate.
For example, a higher-rate taxpayer beneficiary could face an effective combined charge of 64% on amounts they withdraw: £100 becomes £60 after 40% IHT, then £36 after 40% income tax. For larger estates, less than half the pension pot may reach beneficiaries.
The key trade-off: IHT planning vs income tax today
This is where many investors get stuck.
Leave your pension untouched, and you avoid income tax on withdrawals today—but you may face a higher tax burden later, depending on how the IHT changes land and your wider estate position.
Start drawing down, and you reduce what remains inside the pension wrapper—but withdrawals are generally taxed as income, often at 40% or 45%, which can make the timing and scale of drawdown expensive in the moment.
So, the question becomes: is there a legitimate way to reduce the income tax impact of drawing down?
This is where SEIS becomes relevant.
How SEIS can offset income tax
SEIS doesn’t eliminate the income tax on a pension withdrawal. What it can do—subject to eligibility, limits, and having sufficient income tax liability—is offset up to 50% of the income tax bill created by drawing down.
In simple terms:
- Withdraw funds from your pension (taxed as income).
- Reinvest personally into SEIS-qualifying shares (often via a fund).
- Claim up to 50% income tax relief on the amount invested, reducing your income tax liability for that year.
In practice, some investors coordinate a planned pension withdrawal with a planned SEIS subscription in the same tax year, so that the SEIS relief helps reduce the net tax cost of moving funds out of the pension wrapper.
SEIS can therefore reduce the tax friction of extracting money from a pension and moving it into your personal balance sheet—by offsetting part of the income tax created by the withdrawal.
A simplified worked example
Suppose you withdraw pension funds and, as a result, your income tax bill increases materially in that tax year. You then invest £100,000 into SEIS-qualifying shares.
Assuming you have sufficient income tax liability, you may be able to claim up to £50,000 in SEIS income tax relief. That can materially reduce the “tax drag” on repositioning money from pension to personal assets—even though the investment itself remains a high-risk allocation to early-stage companies.
SEIS can also offer additional tax advantages, including CGT exemption on qualifying gains and loss relief if investments fail. For many investors, however, the core attraction in this specific context is simple:
“SEIS helps reduce the income tax bill created by drawing down.”
Some investors also consider the longer-term IHT angle: certain qualifying unquoted shareholdings may become eligible for Business Relief after two years (within the relevant allowance, currently planned to be £2.5m from April 2026), subject to the usual conditions.
When to act
The April 2027 deadline is not a cliff edge, so there is no need to rush everything through before the rules change. But those with substantial pension pots should start planning now, particularly if spreading withdrawals across multiple tax years would manage marginal income tax rates.
Withdrawing £100,000 in one tax year could push you into the additional-rate band (45%). Splitting the same amount across two years might keep you at the higher rate (40%). Since you claim SEIS relief in the tax year you invest, coordinating withdrawal timing with investment timing can optimise your income tax position.
Tax year planning matters most for larger sums. A phased approach reduces income tax liability whilst achieving the IHT planning objective. For example, withdrawing and reinvesting £100,000 per year over three years rather than £300,000 in one go.
Age and time horizon also matter. Someone in their early 60s can spread withdrawals and SEIS investments over a longer period, smoothing the income tax impact. Someone in their late 70s or early 80s may want to act more decisively.
SEIS investments require a three-year holding period to retain full tax benefits. The underlying investments are often illiquid for 3–7 years. You must be comfortable with that timeframe and not rely on this capital for income or liquidity in the near term.
How this connects to SFC Capital
At SFC, we manage the market-leading SEIS fund, building diversified portfolios of around 15 early-stage companies across AI, automation, life sciences, climate tech, B2B software and more. We also manage an award-winning follow-on EIS fund, designed to back the best-performing companies from across our portfolio as they scale.
About Ed Prior
Ed is SFC’s Head of Investor Services at SFC Capital, responsible for Investor Relations and Fundraising. He comes from the political world, where he worked as an election strategist, speechwriter, and in policy development focused on venture capital and innovation. In business, Ed has advised founders and companies at different lifecycle stages on growth strategy, organisational development and equity-based crowdfunding campaigns.
