New rules set to incorporate unused pension funds into inheritance tax from April 2027 are already influencing pension strategies, with retirees drawing funds early and gifting assets to family members to optimise tax outcomes and aid younger relatives.
The long-held advice that pension savings should be left untouched until last is being rewritten as the government prepares to pull most unused pensions into inheritance tax from 6 April 2027. HM Revenue & Customs has set out the change in technical papers and policy notes, saying the reform is designed to bring most unused pension funds and death benefits into a deceased person’s estate for inheritance tax purposes.
That shift is already changing behaviour. MoneyWeek reported a sharp rise in flexible pension withdrawals, with HMRC data showing £22.4bn in taxable payments taken in the 2025/26 tax year, a record level and a jump of £3.8bn on the previous year. The publication also noted that more families are using pension wealth to help children and grandchildren earlier, rather than waiting for assets to pass on death.
Advisers say the instinct to draw down money quickly and hand it away is understandable but can be costly. Michelle Holgate of RBC Brewin Dolphin told MoneyWeek that the change is already reshaping planning conversations, while Ross Coombes of Rathbones said more clients are now helping younger relatives with housing, education and other expenses during their lifetime. Yet Nick Clark of Lubbock Fine Wealth Management warned that large gifts can leave retirees short later on, particularly if care costs arise and local authorities decide money was given away deliberately to reduce eligibility for support.
The tax risks are also broader than inheritance tax. Sean McCann of NFU Mutual told MoneyWeek that only 25% of a pension withdrawal is usually tax-free, with the rest added to income and potentially pushing a saver into the 40% or 45% band. He added that this can trigger the 60% effective tax trap on income between £100,000 and £125,140, cut the personal savings allowance and reduce or remove the money purchase annual allowance for future pension saving. Alongside that, the seven-year rule still applies to most lifetime gifts, though gifts from surplus income can fall outside inheritance tax immediately if they do not affect normal living standards. Annual exemptions and wedding gifts can also help, but only if they are recorded properly and meet the conditions.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
