For years the usual spending order in retirement was simple. Spend your cash, savings and ISAs first, and leave your pension until last. The reason was inheritance tax. Unused pension money normally sat outside your estate, so it could pass to your family free of inheritance tax.
That changes on 6 April 2027. For deaths on or after that date, most unused pension funds and death benefits will count as part of your estate for inheritance tax. So is it time to turn the old rule on its head?
What is changing
From 6 April 2027:
- unused pension pots and most pension death benefits join the rest of your estate when working out inheritance tax;
- inheritance tax is 40% on the part of your estate above your tax-free allowances;
- your executors (personal representatives) must report and pay any tax due on the pension.
Some things stay the same. Pensions left to a husband, wife or civil partner remain free of inheritance tax. Death-in-service benefits from a registered pension scheme stay outside the new rules.
The double tax problem after 75
Income tax still applies on top. If you die before 75, your family can usually take what is left in your pension free of income tax. If you die at 75 or over, they pay income tax on whatever they draw, at their own rate.
HMRC’s technical note says beneficiaries pay income tax only on what is left after the inheritance tax. Even so, the combined bite can be large. Take £100,000 left in a pension above the allowances. Inheritance tax takes £40,000. If your child pays income tax at 40% on the remaining £60,000, that is another £24,000. Your family keeps £36,000 of the £100,000.
Who should rethink their spending order?
The new rules matter most if your estate, including your pensions, is above your tax-free allowances. Today each person has a £325,000 nil-rate band. Many also have a £175,000 residence nil-rate band if they leave their home to children or grandchildren. A married couple can pass on up to £1 million between them without inheritance tax, depending on their circumstances. The residence allowance shrinks once an estate tops £2 million.
If your estate sits well below those figures, the old order may still work best for you.
If it sits above them, drawing more from your pension earlier may make sense. Some ideas to weigh up:
- Use your lower tax bands. Income from £12,571 to £50,270 is taxed at 20% this tax year. Topping your income up to that limit from your pension each year can cost less than leaving the money to be taxed twice later.
- Take tax-free cash. You can usually take 25% of your pension tax-free, up to a lifetime limit of £268,275 for most people.
- Give from surplus income. Regular gifts from income you do not need can fall outside your estate straight away. Last week we explained how the gifts from surplus income exemption works.
- Watch the tax on savings. From April 2027 the basic rate on savings interest rises to 24%. Holding large sums in cash outside an ISA will cost more.
Do not rush
Taking money out of a pension simply to sit in a bank account rarely helps. That money is still in your estate, and it may now be taxed as income too. The right answer depends on your age, health, other income, the size of your estate and who you want to inherit.
Your will matters too. A will that works alongside your pension can save tax and give your family choices. Our sister firm, Abacus Advice Wills & Estates, writes wills and trusts with home visits and fixed fees.
Book a free chat
If you would like to know how the 2027 changes affect your own plans, call me on 01892 320449 to book a free first chat.
Written by Mike Hardy DipFA, Abacus Advice Ltd, Tunbridge Wells.
Important information
This article is general information, not personal advice. It is based on our understanding of the rules on 2 November 2026, which may change. The value of investments, and the income from them, can fall as well as rise, and you may get back less than you invested. Tax treatment depends on your individual circumstances and may change in future. The Financial Conduct Authority does not regulate will writing or most tax and estate planning.
Abacus Advice Ltd is authorised and regulated by the Financial Conduct Authority, firm reference number 402725.
