Pension inheritance tax changes in 2027: should you review your pension drawdown strategy?

Pension inheritance tax changes confirmed under the Finance Act 2026 are expected to reshape retirement, estate and succession planning for thousands of individuals and families across the UK. 

From 6 April 2027, most unused defined contribution pension funds and pension death benefits will form part of a deceased person’s estate for inheritance tax purposes. The government reforms represent a significant shift in how pension wealth is treated for inheritance tax purposes and are likely to prompt many individuals to revisit existing retirement and succession planning strategies.  

Historically, pensions have proved one of the most tax-efficient ways to pass wealth to future generations. Many families prioritised spending other assets first while preserving pension funds outside their taxable estate. The new rules are likely to alter that approach, particularly where inheritance tax exposure already exists across property, investments and business assets. 

As a result, individuals with sizeable pension savings may now want to reconsider whether to leave pension funds invested, increase pension withdrawals, make lifetime gifts or restructure wider estate planning arrangements. 

What are the new pension inheritance tax rules?  

The Finance Act 2026 confirms that most unused pension funds and certain pension death benefits (previously outside of a person’s taxable estate in many cases) will become subject to inheritance tax from 6 April 2027.  

This means pension assets could become subject to inheritance tax at 40% where the total estate exceeds available nil-rate bands and reliefs. 

The reforms primarily affect defined contribution pensions, including many SIPPs, personal pensions and workplace defined contribution arrangements. Different rules may apply to defined benefit schemes depending on the structure of benefits and death entitlements.

Current legislation indicates that executors and personal representatives will become responsible for reporting and paying inheritance tax connected to unused pension funds. ICAEW has raised concerns regarding the practical administration of the rules, including payment deadlines, valuation complexities and the additional compliance burden placed on families and pension providers. 

Although the legislation has now received Royal Assent, further HMRC guidance and secondary regulations are still expected during 2026 to clarify aspects of the administration process. 

Why inheritance tax on pensions is changing from 2027 

For many years, pensions sat outside inheritance tax calculations. This allowed pension wealth to remain invested and potentially pass to beneficiaries in a highly tax-efficient manner. The 2027 reforms may significantly reduce that advantage. 

In some cases, beneficiaries could now face both inheritance tax and income tax on inherited pension withdrawals, depending on the age at death and how they access the benefits. Financial commentators have referred to this as a potential “double taxation” issue for some families. 

The reforms are also expected to affect more middle-income individuals rather than only high-net-worth taxpayers, particularly as frozen inheritance tax thresholds, rising asset values and larger pension balances continue to increase the number of estates exposed to inheritance tax. 

For individuals who previously intended to use pensions primarily as an estate planning vehicle, retirement strategies may now require review. 

Who could be affected by the pension inheritance tax changes? 

The reforms are likely to have the greatest impact on: 

• Individuals with large defined contribution pension funds 
• Business owners and entrepreneurs building pension wealth alongside business assets  
• Retirees preserving pensions for wealth transfer purposes 
• Families with property wealth alongside pension savings 
• Higher and additional rate taxpayers 
• Individuals already exposed to inheritance tax 

Those approaching retirement may also wish to revisit existing pension drawdown plans and succession arrangements to ensure they remain appropriate under the new rules. 

Individuals already undertaking broader inheritance tax planning and estate planning support may particularly benefit from reviewing how pension wealth fits within their wider long-term planning strategy. 

Should you draw down your pension before 2027? 

One of the biggest questions arising from the new rules is whether pension holders should begin drawing down pension funds earlier than originally planned. There is no universal answer. The right approach depends on income needs, tax exposure, investment objectives, family circumstances and wider succession planning considerations. However, the legislation is already prompting many individuals to reassess retirement withdrawal strategies. 

Recent reports suggest advisers are seeing increased pension drawdowns ahead of the reforms as families seek to improve long-term estate planning efficiency.  

For some families, accelerating pension withdrawals before April 2027 may become part of a broader intergenerational wealth and succession planning strategy. For others, retaining pension funds within a pension wrapper may remain appropriate despite the inheritance tax changes. 

Pensions continue to offer valuable tax advantages during lifetime, including tax-efficient investment growth and flexibility over retirement income. 

Leaving funds invested may still support: 

• Long-term retirement security 
• Phased retirement planning 
• Flexible beneficiary options 
• Protection against longevity risk 
• Continued investment growth potential 

Where pension funds still support retirement living costs, aggressive withdrawals purely for inheritance tax planning may create unnecessary financial pressure later in life. Large withdrawals can also trigger additional income tax liabilities and potentially push individuals into higher tax bands. 

Leaving pensions invested versus increasing pension withdrawals 

Some families may consider accelerating pension withdrawals before April 2027 in order to reduce the value potentially exposed to inheritance tax. 

This approach may suit individuals where: 

• Pension balances significantly exceed anticipated retirement needs 
• Other assets already utilise inheritance tax allowances 
• Lifetime gifting forms part of wider estate planning 
• There are concerns regarding future inheritance tax liabilities 

However, increased pension drawdown should be approached carefully. 

Taking larger withdrawals could: 

• Increase immediate income tax liabilities 
• Affect entitlement to certain allowances or benefits 
• Reduce long-term pension sustainability 
• Expose assets to inheritance tax elsewhere if retained personally 
• Increase investment and sequencing risk during retirement 

Any decision to draw down pensions should therefore form part of a wider long-term financial review rather than a standalone tax decision. 

Individuals considering pension withdrawals may also benefit from reviewing their wider self-assessment and personal tax compliance obligations, particularly where larger pension withdrawals could affect income tax exposure. 

Using pension withdrawals for gifting and estate planning 

Some individuals may decide to withdraw pension funds gradually and use surplus income or capital for lifetime gifting. Potentially exempt transfers may fall outside the estate for inheritance tax purposes if the donor survives seven years after making the gift. 

There may also be opportunities to utilise: 

• Annual gifting exemptions 
• Gifts from surplus income 
• Family support arrangements 
• Trust planning in suitable circumstances 

For some families, this may provide greater control over intergenerational wealth transfer while improving long-term estate planning efficiency. However, gifting strategies require careful documentation and professional advice to ensure compliance with HMRC requirements. 

The reforms also reinforce the importance of reviewing wider estate planning arrangements rather than focusing solely on pensions. 

Areas individuals may now wish to review include: 

• Wills and beneficiary nominations 
• Pension death benefit nominations 
• Trust structures 
• Business and agricultural relief eligibility 
• Inheritance tax allowances and thresholds 
• Life insurance arrangements 
• Investment structures outside pensions 
• Retirement income planning 

Early planning may therefore become increasingly important. 

How the new inheritance tax rules could affect retirement planning 

The new inheritance tax framework is expected to have the greatest impact on defined contribution pensions.

This includes many: 

• SIPPs 
• Personal pensions 
• Workplace defined contribution schemes 
• Drawdown arrangements 

Individuals with substantial unused pension funds may therefore wish to review how pension wealth fits within wider family wealth and succession objectives. 

Importantly, pension decisions should not be driven by tax alone. Retirement planning must continue to prioritise financial security, sustainability and flexibility throughout later life. A balanced approach that considers both retirement income needs and inheritance tax exposure is likely to become increasingly important as the 2027 implementation date approaches. 

Many business owners may also wish to review pension strategies alongside wider succession planning, remuneration structures, business tax planning services, and business exit strategies to ensure arrangements remains aligned across both personal and business wealth structures. 

How Rayner Essex can help 

The inheritance tax changes for pensions could have significant implications for retirement planning, family wealth transfer and estate administration. 

At Rayner Essex, our private client specialists work closely with individuals, families and business owners to help them understand how changing tax legislation may affect their long-term financial position. 

We can support you with: 

• Pension and inheritance tax planning 
• Estate and succession planning 
• Retirement tax planning 
• Trust and family wealth structuring 
• Personal tax compliance 
• Reviewing pension drawdown strategies alongside wider tax considerations 

Our tax specialists provide practical and tailored advice designed to help you make informed decisions while balancing tax efficiency, retirement security and long-term family objectives. 

To explore how these pension inheritance tax changes could affect your circumstances, please get in touch with our private client tax team or explore our wider private client and advisory services today. 

Disclaimer: Please note that this document is not intended to give specific technical advice and should not be construed as doing so.  It is designed to alert clients to some of the issues and not intended to give exhaustive coverage of the topic.  Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.