With upcoming changes to how pensions will be taxed when passed on, you might be reconsidering your current retirement strategy. Before making any updates, it’s important to understand the potential impact of these changes and how to strike the right balance between enjoying your retirement and leaving a legacy. At Jordan FM, we’re here to help you navigate these decisions with clarity and confidence.
During the Autumn Budget in October 2024, Chancellor Rachel Reeves announced that from April 2027, unspent pensions are likely to be included in Inheritance Tax (IHT) calculations. According to government estimates, the change is expected to impact around 8% of estates annually.
For the 2025/26 tax year, no Inheritance Tax is due if the total value of your estate falls below £325,000 — this is known as the “nil-rate band.” If you pass on your main residence to direct descendants, you may also benefit from the residence nil-rate band, worth £175,000 in 2025/26. Both thresholds are currently frozen until April 2030.
Your estate includes everything you own — from property and savings to personal belongings. At present, pensions sit outside of your estate for IHT purposes. However, with the upcoming changes in 2027, it’s worth considering how their inclusion could affect the overall value of your estate. Reviewing your retirement and estate plans now could help you make more tax-efficient decisions for the future.
According to a February 2025 survey from Interactive Investor, 54% of UK adults are already planning to adjust their retirement or estate plan in response to IHT changes.
3 ways you might adjust your retirement plan to reflect Inheritance Tax changes
If the inclusion of your pension in your estate could increase the amount of IHT due, you might decide to update your retirement plan. Here are three options you could consider.
1. Increase your spending during retirement
The upcoming changes could be a good reason to re-evaluate your retirement goals and consider making the most of your pension while you’re still able to enjoy it. By spending more of your pension during your lifetime, you may reduce the value of your estate and potentially lower any IHT liability.
According to an Interactive Investor survey, 19% of participants said they plan to withdraw more from their pensions to gift money, while 6% are considering bringing forward their retirement date.
If you’d rather enjoy your pension yourself than leave it behind, what would that look like? It could be the perfect time to plan that bucket list holiday, contribute more to causes you care about, or simply enhance your lifestyle — from theatre outings to fitness memberships.
That said, any increase in spending should be weighed against your long-term financial sustainability. A well-thought-out financial plan can help you understand whether higher pension withdrawals could leave you short later in life.
Also bear in mind that taking larger withdrawals could increase your Income Tax bill. Pension withdrawals are added to your other sources of income and may push you into a higher tax band, so it’s important to consider the potential tax implications.
2. Use your pension to gift wealth during your lifetime
If your original plan was to leave your pension to loved ones as part of your estate, the proposed changes might prompt you to consider gifting earlier. Withdrawing regular amounts or a lump sum from your pension could allow you to provide financial support to family members while you’re still here to see the benefits.
A well-timed gift could have a more immediate impact than an inheritance received later in life — helping a loved one get onto the property ladder, cover education costs, plan a wedding, or simply ease the pressure of rising living expenses.
However, it’s important to be aware of the “seven-year rule.” If you gift assets and pass away within seven years, they may still be counted as part of your estate for IHT purposes. That’s why it can make sense to begin gifting earlier in retirement if your goal is to reduce your future tax liability.
As always, consider the wider picture — large pension withdrawals could increase your Income Tax bill, and gifting too generously might affect your long-term financial security. A financial adviser can help you find the right balance.
3. Reduce your pension contributions
According to the Interactive Investor survey, 8% of respondents are considering reducing their pension contributions in response to the upcoming IHT changes.
In some cases, this could be a sensible move, particularly if you’ve already built sufficient pension wealth to support your retirement and want to redirect funds into assets that may be passed on more tax-efficiently. However, it’s important to avoid making hasty decisions without a full review of your financial picture.
While unspent pension savings could fall within the scope of IHT from 2027, pensions still offer valuable tax advantages. For example:
- Pension contributions usually benefit from tax relief
- You can typically withdraw 25% of your pension (up to £268,275) tax-free
- Investments held within your pension aren’t subject to Capital Gains Tax
So, even though pensions may eventually impact your estate’s IHT bill, continuing — or even increasing — your contributions might still make sense as part of a well-structured financial plan.
Get in touch to talk about your pension and estate plan
If the incoming changes mean you’re unsure how to manage your pension or pass on wealth to loved ones, please get in touch. We can work with you to create or adjust a tailored financial plan that considers your circumstances and goals as well as regulations.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate estate planning or Inheritance Tax planning.
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