Most of what has been written about the April 2027 pension changes explains what is happening: from 6 April 2027, most unused pension funds and pension death benefits are due to be included in the value of your estate for inheritance tax. We covered that ground in our earlier article on what April 2027 means for your estate.
The question that gets far less attention is what it changes about behaviour, because for a lot of people, it does not simply alter what their family eventually receives. It alters the sensible order in which they spend their money during retirement.
The strategy that is being reversed
For the past decade, anyone with a reasonable spread of assets was often steered toward the same broad approach: draw on ISAs, savings, investments and property income first, and leave the pension untouched for as long as possible. Pensions sat outside the estate, so preserving them was the most tax-efficient way to pass wealth on. Spending them last was, for many, simply the right answer.
Once unused pension funds count towards the estate, the logic that drove that ordering no longer holds in the same way. The pension stops being the protected asset and becomes, for inheritance tax purposes, much like the rest. For some households that will make relatively little difference. For others, particularly those whose wealth is concentrated in pensions and property, it changes the whole shape of the plan.
Not everything falls into the net
It is worth being clear about what is and is not affected, because the detail matters and the coverage often skips it.
The existing spousal exemption is maintained. Anything passing to a surviving spouse or civil partner remains exempt, as it is today. Death in service benefits from registered schemes are also expected to remain outside the estate.
Where annuities are concerned, the treatment splits. Ongoing income continuing to a survivor under a joint life, dependants’ or nominees’ annuity is expected to fall outside the estate, on the basis that it is continuing income rather than a transfer of wealth. Guarantee periods and value protection, by contrast, are expected to remain within scope. Two features of the same product, treated in opposite ways.
Dependants’ scheme pensions from occupational schemes are also expected to be excluded. As with everything here, the final position remains subject to the remaining legislation and HMRC guidance.
What people are actually considering
We are not going to tell you what to do, because the right answer genuinely depends on the size and shape of your estate, your income needs, your health, your family circumstances and your own priorities. But these are the conversations happening most often.
Spending the pension rather than preserving it. If pension income can be drawn at a lower rate of income tax than the inheritance tax that would otherwise apply, using more of the pension during retirement, and leaving other assets to pass on instead, may produce a better overall outcome. The arithmetic is specific to each person, and it is easy to get wrong in both directions.
Securing income rather than holding a fund. Because continuing annuity income to a survivor is expected to sit outside the estate, annuitisation is being looked at more closely than it has been for years, particularly by people who want a guaranteed income anyway. The trade-off is significant and permanent: an annuity cannot normally be changed or cancelled once set up, and there is no residual fund to leave. It is one option among several, not a solution in itself.
Lifetime gifting. Giving during your lifetime reduces the estate, and existing exemptions and the seven-year rules apply as they always have. The obvious constraint is that you must be confident you will not need the money later, a mistake that is difficult to undo.
Life assurance written in trust. Rather than reducing the liability, this approach aims to provide a sum outside the estate to meet it, so the family is not forced to find the tax from other assets. Whether it is appropriate, and at what cost, depends heavily on age and health.
Wider estate structuring. For larger estates, tools such as investment bonds held in an appropriate trust may form part of a broader plan. These are specialist arrangements with their own costs, tax consequences and restrictions, and they suit some situations and not others.
Two cautions worth stating plainly
Doing nothing is a decision. Estates that comfortably sat below the thresholds may not once pension wealth is included, and with the nil rate band at £325,000 and the residence nil rate band at up to £175,000 both frozen while asset values have risen, more families are affected each year. April 2027 is close enough that the planning window is now, not later.
Acting hastily can cost more than the tax. The instinct to withdraw large sums from a pension to get them out of the estate is understandable and frequently expensive. Substantial withdrawals can push income into higher bands, with income tax charged at up to 45% today against a potential 40% inheritance tax charge later, and the money is then in your estate anyway unless it is spent or gifted. This is precisely the kind of decision that should be modelled properly before anything is done.
Review it on your timetable
The families who handle this well will be the ones who looked at it calmly, with time to weigh the options, rather than reacting in the weeks before the rules change. If your retirement plan was built on the assumption that your pension would pass on outside your estate, it is worth revisiting that assumption now.
Our inheritance tax and estate planning and retirement planning services are provided on a fully advised basis, and the first conversation is free and without obligation. We also work with clients whose circumstances are more complex through our high net worth service. Free impartial guidance on your retirement options is available from MoneyHelper.
This article is for general information only and does not constitute advice, and no course of action is recommended. It describes the position as understood at the time of writing; the inheritance tax treatment of pensions and pension death benefits from 6 April 2027 remains subject to final legislation and HMRC guidance and may change. Tax treatment depends on your individual circumstances. The value of investments can go down as well as up and is not guaranteed. An annuity cannot normally be changed or cancelled once set up and will not be right for everyone. Inheritance tax and estate planning, and some forms of trust advice, are not regulated by the Financial Conduct Authority. Our advised services are provided on a fully advised basis by FCA-regulated advisers. Free impartial guidance is available from MoneyHelper. Retirement Professionals Ltd is an appointed representative of pi financial ltd, authorised and regulated by the Financial Conduct Authority. FCA number 622943.