The Rules on Pensions and Inheritance Tax Are Changing

This is a fundamental change. Until now, many people have chosen to preserve their pension for later life or pass unused pension wealth to their beneficiaries because most discretionary pension benefits have generally fallen outside the estate for Inheritance Tax. That assumption will no longer hold for many families.

The change does not mean that everyone should immediately withdraw or reorganise their pension. It does mean that retirement income, pension withdrawals and estate planning can no longer be considered separately. Decisions about which assets to use, when to take income and how much pension wealth to retain may affect both financial security during retirement and the value ultimately passed to beneficiaries.

Why reviewing your retirement income plan matters now

A retirement strategy established under the current rules may produce a different outcome after April 2027. The appropriate response will depend on the size and structure of the estate, income requirements, tax position, family circumstances and the terms of each pension arrangement. Our guide to pensions and inheritance tax from April 2027 sets out the wider change in full.

For some people, retaining flexibility will remain important. Others may need to reconsider the order in which they use pensions, investments, savings and other assets. The purpose of a review is not to promote one solution, but to understand how the confirmed change affects the plan as a whole before making irreversible decisions.

Income needs can change over time

A retirement income plan that suits someone at the point they stop working may not suit them ten or twenty years later. Spending patterns, health, family responsibilities and personal priorities can all shift, sometimes gradually and sometimes suddenly. Reviewing a plan against how needs are actually changing, rather than how they were expected to change, is often worthwhile.

Most people balance a number of considerations at once: essential expenditure that has to be met, discretionary spending that adds to quality of life, the ability to access capital if something unplanned arises, and a degree of resilience against risks that play out over a long period of time.

Different approaches to retirement income

There are several broad approaches people use to structure retirement income, often in combination rather than alone. These include income with a guaranteed element, flexible withdrawals from invested funds, and cash reserves held to cover shorter-term or unplanned needs. The order in which income and capital are drawn — sometimes called sequencing risk — can matter as much as the mix itself, particularly if markets fall early in retirement. Each approach works differently, and which combination is appropriate depends on individual circumstances, priorities and attitude to risk. Our guide to pension drawdown versus annuity options sets out how flexi-access drawdown, lifetime annuities and hybrid approaches compare. This page does not set out to compare these approaches or suggest that one is generally preferable to another.

Official information

The change described on this page follows the Finance Act 2026. For the government’s own account of the rules — including which pension and death benefits are included, which are excluded, and how the existing exemptions apply — see:

• HMRC’s technical note: Inheritance Tax on pensions
• HMRC’s policy paper: Inheritance Tax on unused pension funds and death benefits

Not every pension or death benefit is affected, and not every estate will pay Inheritance Tax as a result of this change. Registered pension scheme death-in-service benefits are excluded. Existing exemptions remain relevant, including the exemption for transfers that benefit a surviving spouse or civil partner. Whether any of this applies to a particular estate depends on individual circumstances.

Peter Rose

Peter Rose is a financial planner at Aetas Wealth, advising private clients, families and business owners across the UK on retirement and later-life financial planning. He works with clients to think through how their retirement income needs may change over time, and to keep their plans under regular review.

peter.rose@aetas-wealth.com