The old rule was pensions last. The announced 2027 changes may reverse it. What to weigh before you act.
For the past decade, the standard guidance for anyone thinking about inheritance tax has been simple: spend your other savings first and leave your pension until last. Pensions have sat outside the taxable estate, which made them the most tax-efficient asset to pass on. Many people have deliberately run down ISAs and cash while barely touching their pension for exactly this reason.
The government has announced plans to include pension funds in your taxable estate from April 2027. This has not yet been confirmed in law and could change. If it proceeds as announced, the logic that shaped those decisions is turned on its head.
Since 2015, unused pension funds have generally passed to beneficiaries free of inheritance tax. If you died before age 75, your beneficiaries could usually draw the money free of income tax as well, subject to allowances. If you died after 75, they paid income tax at their own rate on what they withdrew, but no inheritance tax applied either way.
That made the pension a shelter. A pound inside the pension could pass to your family more efficiently than a pound in an ISA, a savings account, or a share portfolio. So the sensible order was to spend everything else first.
From April 2027, under the announced plans, unused pension funds would be counted as part of your estate when inheritance tax is calculated. A pension that would previously have passed outside the estate would instead be added to the value of your home, savings, and investments, and taxed at 40% above your available allowances.
The double tax problem. For deaths after age 75, beneficiaries would still pay income tax on pension withdrawals at their own marginal rate, on top of any inheritance tax charged on the fund. Depending on the beneficiary's tax band, the combined effective rate on inherited pension money could exceed 60%. This combination is the single biggest reason the old "pension last" advice is being rethought.
If pensions join the taxable estate, the comparison changes. Money drawn from your pension during your lifetime is subject to income tax, typically at 20% or 40% depending on your other income. Money left in your pension at death could face 40% inheritance tax, and then income tax again when your beneficiaries draw it.
For some people, that arithmetic will favour drawing pension income earlier: covering living costs from the pension rather than from ISAs and cash, using pension income to make regular gifts, or reconsidering when to take tax-free cash. Spending the asset that may become heavily taxed at death, while preserving the assets that are not, is the mirror image of the old advice.
Three reasons for caution before acting on any of this.
It is not law yet. The change has been announced and consulted on, but the final legislation could differ in its detail or its timing. Decisions like large pension withdrawals cannot be undone if the rules land differently.
Withdrawals have their own tax cost today. Taking more than you need from a pension can push you into a higher income tax band immediately, crystallising a certain cost now against an uncertain saving later.
Your retirement comes first. A pension exists to fund your life. Running it down to reduce a possible future tax bill only makes sense if your income needs are comfortably secured for the rest of your life, including care costs.
Worth knowing. Regular gifts made out of surplus income can be immediately exempt from inheritance tax under the normal expenditure out of income rules. For someone with more pension income than they spend, this can be one of the most efficient responses to the announced changes, and it works under today's rules as well.
Because the change is announced but not yet confirmed, our calculator lets you model your estate both ways: under today's rules, and with your pension included from April 2027. Seeing both numbers side by side is the clearest way to understand what the change would mean for your family, and how much planning attention it deserves.
For the full background on the announced change, read our main guide to pensions and inheritance tax from 2027.