For years, a common retirement planning strategy was to preserve pension funds for as long as possible and draw from other assets — ISAs, savings, investments — first. The reason was straightforward: pension funds fell outside the estate for inheritance tax, so leaving them unspent was a tax-efficient way to pass wealth to the next generation.
From 6 April 2027, unspent pension funds become subject to inheritance tax at 40% on the portion above the nil-rate band. The pension loses its IHT-exempt status. For many clients, this reverses the logic: drawing from the pension first and preserving the ISA — which does not form part of the estate in the same way — becomes the more efficient strategy.
This is not a rule that applies universally. It depends on the size of the estate, income tax position, and how long you expect to need the income. But it is a question that most people in retirement or approaching retirement should now be asking.
The sequencing question only materially affects those whose estates will exceed the nil-rate band (£325,000 per person, £650,000 for couples) once the pension is included. If the total estate — including the pension — is below the threshold, IHT efficiency is a secondary consideration and income tax on drawdown is the primary driver.
Pension withdrawals above the tax-free lump sum are subject to income tax at your marginal rate. Drawing heavily from the pension to reduce the IHT liability may push you into a higher income tax band, reducing the net benefit. The interaction between income tax and IHT savings needs to be modelled for your specific situation.
The pension commencement lump sum — 25% of the fund up to £268,275 — is taken free of income tax and moves funds out of the pension into assets that have a different IHT profile. Whether to take the PCLS before crystallisation, and how to invest the proceeds, is an important part of the drawdown sequencing decision.
Pension funds can still pass to a surviving spouse free of IHT on the first death under the spousal exemption. If you are married, the sequencing decision is partly about managing the position on the second death — where the pension will form part of the surviving spouse's estate. The second-death IHT position needs to be part of any drawdown strategy review.
A detailed look at how the Finance Act 2026 changes the income strategy for people already in retirement or approaching it.
Read articleHow the pension commencement lump sum works, the £268,275 cap, and how its timing interacts with the post-2027 IHT rules.
Read articleThe complete guide to what is changing, why it matters, and the practical steps to consider before the April 2027 deadline.
Read the briefingHow Aetas Wealth works with clients on pension IHT planning, led by Peter Rose APFS.
Learn moreThe Financial Conduct Authority does not regulate Wills, Trusts or Tax advice. Tax treatment depends on individual circumstances and may be subject to change in the future. The information on this page describes general considerations and does not constitute regulated financial advice. If you are considering changing your drawdown strategy in light of the Finance Act 2026 changes, we recommend speaking with a regulated financial adviser who can model your specific position.
Book a free initial conversation with Peter Rose APFS. We will model your current drawdown sequence against your IHT position and show you whether a change makes sense.
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