We are now just over six months away from the long-anticipated reforms to Inheritance Tax (IHT), which will see unspent pensions included within a person’s estate from April 2027.
First announced all the way back in the 2024 Autumn Budget, the move is expected to result in 10,500 more estates becoming liable for IHT in the 2027/28 tax year.
The changes will also mean that 38,500 estates will pay a higher IHT amount than under current rules.
Uncertainty over IHT treatment of pensions has also fuelled a surge in withdrawals. Financial Conduct Authority data shows the total value withdrawn from pensions reached £91.2 billion in 2025/26, up 70 per cent from £53.6 billion two years earlier.
What do the reforms to Inheritance Tax mean?
From 6 April 2027, most unused pension funds and death benefits will count as part of your taxable estate for IHT.
Thankfully, spouses, civil partners and registered charities remain exempt from IHT on inherited pension funds, but the beneficiaries of a couple’s combined estate will face tax on any pensions that push the value of their inheritance above the current thresholds.
With the IHT nil-rate band remaining frozen at £325,000 and the residence nil-rate band of £175,000 also remaining unchanged until April 2031, this change is going to affect many families in future.
As you can see from the level of withdrawals that have already taken place, some people are acting early to reduce the size of their pension and their taxable estate.
What can I do to reduce the risk of an Inheritance Tax bill?
More people are dipping into their pension savings and this trend points to one practical measure available to anyone concerned about IHT.
Most UK savers are able to draw a quarter of their pension pot without paying tax once they reach 55. From 6 April 2028, that minimum age moves up to 57.
The amount that can be taken tax-free is capped at £268,275. Drawing a lump sum up to this figure can help people meet growing living costs, although this will only reduce the estate they leave behind if the money is spent or gifted. Cash that is withdrawn and left in a bank account still counts towards your estate for IHT.
Taking money out also opens the door to passing wealth on to family sooner than you might otherwise have intended.
Timing matters here, as if you die within seven years of making a gift, it may still count towards your estate for IHT purposes.
It is also worth pausing before treating a pension withdrawal as the obvious answer.
While it can cut your potential IHT exposure, it leaves you with a much smaller pension pot and gives up the investment growth that money might otherwise have achieved.
This is not a straightforward choice and it is one you need to be confident about before acting.
Get tax and financial advice before dipping into your pension
If you are concerned about the impact that your pension may have on your IHT bill in the future, then it is important to seek advice.
Speaking with a tax adviser, alongside an independent financial adviser, can help you to balance your retirement needs against a future tax liability for the beneficiaries of your estate.
If you would like guidance ahead of these changes in 2027, please speak to our team.
Jim Botton – Pleasure Beach (Skegness)
