For more than a decade, the standard piece of UK retirement tax advice ran along the same lines. Spend your ISA first. Leave your pension alone. The pension passes outside your estate for inheritance tax, so on death an unused pot could go to your children or grandchildren without the forty percent IHT charge that would otherwise hit the rest of your estate.
That advice ends on 6 April 2027.
From that date, most unused pension funds and lump-sum death benefits become part of your estate for inheritance tax purposes, taxable at up to forty percent above the available nil-rate bands.
This guide explains what is changing, who it affects, and what to actually do about it.
Before we go any further, the headline that the alarmist commercial coverage of this change tends to skip. Most UK estates will continue to pay no inheritance tax at all. The change matters significantly for some people and not at all for others. The first job is working out which group you are in. The second is making sensible decisions if it turns out you are in the first group.
What is actually changing
The current position is this. Most defined contribution pensions in the UK sit outside the estate for inheritance tax because they are paid at the discretion of scheme trustees. That has made the pension wrapper unusually powerful as an inheritance vehicle. You could spend other assets in retirement and pass the pension on largely tax-free, which is why a generation of retirement planning advice has prioritised preserving the pension and drawing other pots first.
It was, by any reasonable measure, an extraordinarily generous treatment. It is the kind of thing that, once you noticed it, made you wonder how long it would last.
The answer turned out to be: until April 2027.
From 6 April 2027, unused defined contribution pension funds and most lump-sum death benefits payable from a registered pension scheme will be added to the value of the estate for inheritance tax. The headline IHT rate is forty percent on estates above the available nil-rate bands.
A few things are not changing, and they matter as much as what is.
Transfers between spouses and civil partners remain exempt. This includes pension assets passing to a surviving spouse, which the government confirmed explicitly in the Autumn Budget 2025 after the original consultation raised concerns. Gifts to registered charities continue to be exempt. Death-in-service benefits from registered pension schemes are excluded from the new rules. Defined benefit pensions already in payment are unaffected by this specific change. The income continues, the spousal portion if there is one continues, and there is no estate value to be added to the IHT calculation in the way there is for an unused DC pot.
The principle behind the change, as the Treasury has framed it, is to prevent the pension wrapper being used primarily as a vehicle to transfer wealth across generations rather than to fund retirement. Whether you agree with that framing or not, the legislation is now in place.
The numbers that matter
The nil-rate band is the threshold below which no inheritance tax is paid. It sits at £325,000 per individual and has done since 2009. The residence nil-rate band adds up to £175,000 per individual if a home passes to direct descendants, meaning children or grandchildren.
Spouses and civil partners can pass unused allowances to each other on death. A married couple passing their home to direct descendants can therefore typically shield up to £1 million before inheritance tax bites on the second death.
The government’s own estimates suggest around 10,500 estates will become liable for inheritance tax for the first time as a result of the 2027 change. A further 38,500 already-taxable estates will pay more than they would have done. That means total impact across roughly 49,000 estates a year, set against approximately 700,000 deaths annually in the UK. Most estates will continue to pay nothing.
The honest read on the numbers is this. If your total estate including your pension is comfortably under £325,000 as a single person, or £1 million as a married couple passing a home to direct descendants, this change is largely irrelevant to you. If your estate is anywhere near or above those thresholds, the change is material and worth thinking through carefully.
Who this actually affects
Let me show you what this looks like in practice, with three illustrative cases.
Case one: a married couple comfortably below the threshold. A retired couple with a combined defined contribution pension pot of £350,000, a home worth £250,000, and ISAs totalling £80,000. Total estate value: £680,000. Combined nil-rate band and residence nil-rate band on the second death: £1 million. No inheritance tax under the old rules. No inheritance tax under the new rules. This change does not require any action from this couple. They can plan their retirement using the principles in how to make your pension last without factoring in IHT at all.
Case two: a married couple just over the threshold. A retired couple with a combined pension pot of £800,000, a home worth £600,000, and modest other savings. Total estate value: roughly £1.4 million. Under the old rules, the £800,000 pension sat outside the estate, so the IHT calculation only ran against the home and other assets. Combined allowances of £1 million covered it, and there was no IHT to pay. Under the new rules, the pension is added to the estate. The taxable estate is now £400,000 above the £1 million combined threshold, generating an IHT bill of £160,000 on the second death. The change has created a meaningful tax liability where none previously existed.
Case three: a single retiree. A retiree with no spouse, a pension pot of £600,000, and a home worth £300,000. Available allowances: £325,000 nil-rate band plus £175,000 residence nil-rate band, totalling £500,000. Under the old rules, the pension was outside the estate, so only the £300,000 home was assessed against the £500,000 allowance and there was no IHT to pay. Under the new rules, the estate is £900,000, of which £400,000 is taxable, generating an IHT bill of £160,000.
A six-figure IHT bill where, twelve months earlier, there was none.
These three cases are illustrative, not exhaustive. But they make the shape of the change clear. Below the thresholds, nothing happens. Above the thresholds, a sometimes-substantial bill arrives where one did not exist before. The cases that need real thought are the ones in the middle, where adding a pension to the IHT calculation pushes an otherwise-untaxable estate into IHT territory.
What this means for which pot you draw from first
This is the strategic question that sits at the heart of the change.
Historically, the right answer for most people with both a pension and an ISA was to preserve the pension and draw the ISA first, on the grounds that the pension was the more inheritance-tax-efficient asset to leave behind. The pillar how to make your pension last covers the basic mechanics of withdrawal ordering. The post on Stocks and Shares ISA versus SIPP covers the asset-by-asset comparison.
The pre-2027 logic ran like this. Within retirement, draw enough pension to use your personal allowance and basic rate band tax-efficiently, then top up with ISA money. Over the long term, lean towards preserving the pension so it could pass on tax-free. The combination of in-year tax efficiency and long-term inheritance efficiency made the pension the natural asset to ration carefully.
I have lost count of the number of times I heard this advice given, repeated, and acted on over the last decade. It was the right advice at the time. It is not the right advice for everyone from April 2027.
From that date, the inheritance argument for preserving the pension is substantially weakened for estates that will face IHT, and disappears entirely for estates that will be heavily exposed. The new question becomes: if the pension is no longer tax-free for my beneficiaries, am I drawing it down too cautiously?
For most retirees in IHT territory, the answer is probably yes.
The implication is straightforward. If your estate is heading towards an IHT liability and a meaningful portion of that liability arises from your pension, the case for spending your pension faster strengthens. You enjoy more of the money during your lifetime, which is the point of building the pot in the first place, and you reduce the IHT exposure that would otherwise hit your beneficiaries. This is not a tax avoidance strategy. It is simply using the asset for its intended purpose, on a slightly accelerated timetable.
The two illustrative cases above where IHT applied generated bills of £160,000. Drawing the pension down more aggressively during retirement, within sensible withdrawal-rate limits, would reduce the eventual pension balance in the estate and reduce the IHT bill proportionally. Whether that is the right call depends on the rest of your circumstances, but it is now a question worth asking, where previously it was not.
For estates that will not face IHT regardless, none of this applies. Withdraw at the rate that suits your retirement needs, using the framework in the decumulation pillar, and ignore the IHT noise.
The planning levers that genuinely matter
For readers who do find themselves in IHT territory after 2027, there are several planning options worth understanding. None of these are universal recommendations. They are the levers available, in plain English, for you to evaluate against your own circumstances.
Drawing the pension down faster during retirement. The simplest response. If preserving the pension no longer carries an inheritance tax advantage, the case for using it strengthens. You enjoy the money you saved, and you reduce the IHT exposure of the estate at the same time. The decumulation pillar’s framework on sensible withdrawal rates still applies. The question is where in the three-to-four-and-a-half-percent range you sit, and whether you have been erring on the cautious side for reasons that no longer apply.
Gifting during your lifetime. The existing rules on lifetime gifting continue unchanged. The seven-year rule for potentially exempt transfers remains. Gifts out of normal expenditure that do not reduce your standard of living are immediately exempt from IHT regardless of the seven-year period, which is one of the most useful and underused planning tools in the UK system. The annual exemption of £3,000 per donor per year, the small gifts allowance of £250 per recipient per year, and the wedding gift exemptions all retain their force. For retirees whose pension income comfortably exceeds their spending, regular gifting from that surplus income becomes a significantly more attractive strategy than it was before the IHT change. In my experience, this is the single most underused IHT planning tool available to ordinary retirees.
Annuities. A point that deserves clearer airing than it usually gets. Once a pension pot is converted into an annuity, it ceases to be an unused pension fund. The income stream continues, but there is no underlying balance sitting in the estate to be taxed. For some retirees with material IHT exposure, partially annuitising the pension after 2027 becomes more interesting than it would have been before. The case is not that annuities are inherently better than drawdown, because they are not, but that the IHT calculation changes the comparison enough to warrant a fresh look.
Spousal exemption planning. Possibly the most powerful lever in the system, and one that did not change. Transfers between spouses and civil partners remain entirely exempt from IHT, both for the rest of the estate and for the pension component. Most couples can still defer all IHT until the second death and use both sets of allowances at that point. Coordinated planning between spouses, ensuring that allowances are used efficiently and that the surviving spouse is not left in an unnecessarily exposed position, is more valuable than ever. This is one area where conversations between you, your spouse, and possibly a solicitor are worth having well in advance.
Whole-of-life insurance written in trust. A strategy that has existed for years and gets a second look from people who did not previously need it. A whole-of-life policy with the benefit written into trust pays out on death into a vehicle that sits outside the estate, providing funds for beneficiaries to pay the IHT bill without eroding the inherited assets themselves. The cost depends on age, health, and the sum assured. Worth investigating for some larger estates, particularly where the IHT exposure is concentrated and predictable. This is also the area where regulated advice has the most genuine value, because the trust mechanics are complex and the cost of getting them wrong is significant.
A few traps and misconceptions to flag
The “act now or your family will pay” framing dominating much of the commercial coverage of this change is misleading. The new rules apply to deaths on or after 6 April 2027. Existing pensions do not need to be transferred, restructured, or accessed before that date to comply. There is no penalty for continuing with sensible drawdown using the framework you already have.
The change does not apply to defined benefit pensions in payment. If you have a final salary or career-average pension drawing an income, this specific change has no effect on you. Your income continues, your spouse’s portion if there is one continues, and there is no estate value to be added to the IHT calculation in the same way as for an unused defined contribution pot. Most public sector workers and many older private sector employees will find that this change is, for the bulk of their pension wealth, simply irrelevant.
The interaction with income tax for beneficiaries is worth understanding properly. Where the pension holder dies before age 75, beneficiaries can usually draw inherited pension benefits without income tax. Where the pension holder dies at or after 75, beneficiaries pay income tax on the withdrawals at their own marginal rate. From April 2027, where IHT also applies to the pension, beneficiaries of estates where death occurred after 75 could face both IHT on the underlying pension value and income tax on what they draw, producing combined effective rates that can be very high in extreme cases. The government has acknowledged this and is making some adjustments to mitigate the worst cases. The combination is the strongest single reason that drawing the pension down faster during the saver’s lifetime, rather than preserving it intact, becomes more attractive for affected estates.
Do not make irreversible decisions in haste. Withdrawing a very large pension lump sum in a single tax year to get ahead of the change can trigger immediate income tax bills, often at the higher or additional rate, that exceed the eventual IHT saving. The maths is entirely circumstance-specific. Anyone considering major pre-2027 action on a pension worth more than a few hundred thousand pounds should model the alternatives carefully or seek regulated advice before acting. The cost of getting this wrong can run to tens of thousands of pounds. The cost of doing nothing for another year while you think it through is usually negligible.
I have watched people make both kinds of mistake. The first is more common and more expensive.
What to actually do, in order
Here is a practical sequence for working through the change, in roughly the order it makes sense to think about it.
Add up your estate. Home, savings, ISAs, pensions, other investments, less any mortgage or outstanding debts. Then compare against the nil-rate bands available to you. £325,000 for a single person, plus up to £175,000 residence nil-rate band if a home passes to direct descendants. Up to £1 million combined for a married couple in the same circumstances. If you are comfortably under your thresholds, you can stop reading at this point and return to the broader retirement plan in how to make your pension last.
If you are at or above your thresholds, work out approximately how much of the IHT exposure relates to your pension specifically. This is the portion that the 2027 change is creating. The rest of your estate was already in the IHT calculation under the old rules.
Re-examine your withdrawal rate. If you have been drawing your pension cautiously to preserve it for inheritance reasons, the case for that caution has weakened. The framework set out in how to make your pension last gives you the sensible range to work within. Within that range, IHT-exposed retirees should now sit slightly higher rather than slightly lower.
Use the gifting allowances. Annual exemptions, small gifts, gifts out of income. These existed before the change and continue. For IHT-exposed estates, they are now meaningfully more valuable.
Review your expression of wishes form with your pension provider. Make sure your nominated beneficiaries are still the people you would want to receive the funds, and that your provider knows. This takes twenty minutes. It can be done online with most providers. The cost of not doing it is significant. The cost of doing it is nothing.
Talk to your spouse or civil partner about coordinated planning. The spousal exemption remains and is unchanged. Couples have more flexibility than individuals, and using both sets of allowances efficiently on the second death is more valuable than ever.
If your estate is large, complex, or includes a business interest, please talk to a regulated financial adviser. The cost of an hour or two of properly qualified advice on a large estate facing the 2027 change is consistently smaller than the cost of the mistakes it prevents. I have seen this play out many times over twenty-five years in the industry. The ones who took advice, on the whole, did better. Not always. But on the whole.
For everyone else, the planning is straightforward. Know your numbers, draw your pension at a sensible rate, use your gifting allowances, keep your wills and powers of attorney current, and review annually.
The thing that actually matters
The 2027 inheritance tax change is real and matters for the estates it affects. It is not, for most people, catastrophic. For the substantial majority of UK pension holders, the change has no practical impact at all. For those it does affect, it is a planning question that responds well to clear thinking, calm modelling, and a willingness to use the tools that exist.
The fundamentals of sensible retirement planning are unchanged. Work out what you need. Structure your pot so a bad market sequence in the early years does not derail you. Draw your withdrawals tax-efficiently. Review once a year. Keep the unpleasant paperwork up to date. How to make your pension last lays out the full framework, and nothing in the 2027 change overturns it.
What has changed is the long-term inheritance overlay. For some readers, that means leaning into the pension during retirement rather than preserving it. For others, it changes nothing at all. The difference between the two depends on your numbers, not on the volume of the panic that surrounds the change in the commercial coverage.
You spent forty years building the pot. You earned the right to enjoy it during your lifetime, and to pass on what is left of it in the most sensible way you can arrange. The 2027 change tilts those two goals slightly closer together, which is not necessarily a bad outcome.
The longer treatment is in Simple Investing for Retirement, including more detailed worked examples and the wider context of estate planning in the round. The complete beginner’s guide to investing in the UK sits behind the broader investing case. And how UK pensions actually work covers the accumulation half of the journey for anyone still building the pot.
If you are in IHT territory and have been preserving your pension on grounds that are about to disappear, the time to rethink is now, while you still have years to act on the new logic.
If you are not in IHT territory, the time to stop worrying about this change is also now.
Either way, the decision is yours to make calmly, with the numbers in front of you and the panic safely outside the room.