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 proposal 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 Seed Enterprise Investment Scheme (SEIS) investing 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.
What’s changing
Under the proposal 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 will now face IHT. That is why more HNWs 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.
The key trade-off: IHT planning vs income tax today
This is where many investors get stuck.
If you leave your pension untouched, you avoid paying income tax on withdrawals now, but you will face a higher tax burden later depending on how the final IHT rules land and your wider estate position.
If you draw down from the pension, you can reduce what remains inside the pension wrapper - but the withdrawal is typically taxed as income, which can be expensive in the moment.
So the question becomes:
Is there a legitimate way to reduce the income tax impact of drawing down?
In some cases, this is where SEIS becomes relevant.
How SEIS offsets income tax
SEIS does not eliminate the tax. What it can do is offset up to 50% of the income tax you’ve triggered by withdrawing pension funds - subject to eligibility, limits, and having sufficient income tax liability.
The logic looks like this:
- Withdraw funds from your pension (taxed as income).
- Reinvest personally into SEIS-qualifying shares (usually via a fund or direct investments).
- Claim SEIS income tax relief of up to 50% of the amount invested, reducing your income tax bill.
SEIS can materially reduce the tax cost of extracting money from a pension and moving it into your personal balance sheet.
You can read more about SEIS tax relief benefits available to investors here.
A simplified worked example
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.
You can claim up to £50,000 of SEIS income tax relief (assuming you have sufficient income tax liability).
So, while the £100,000 investment is invested into high-risk early-stage companies, the income tax relief can reduce the net “economic cost” of shifting wealth from pension to personal assets.
SEIS also offers other tax advantages including tax-free profits on the future sale of SEIS shares and loss relief when investments fail. But for many investors the driver is simply:
“SEIS helps me manage the income tax bill created by drawing down.”
How this connects to SFC Capital
At SFC, we manage the market leading SEIS fund, building highly 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 follow-on in the best performing companies from across our portfolio as they grow.
For more information, please contact us at invest@sfccapital.com.
Tax benefits are subject to individual circumstances. Subject to changes.
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