Six months until inheritance tax applies to pensions

In April, one of your most valuable assets will count towards inheritance tax (IHT) for the first time, potentially triggering a tax bill.

Pensions were previously exempt from IHT and weren't included in the value of your estate.

After the rules change, the combination of pensions and your home could push over the tax-free allowances, upsetting the most careful of plans.

Here, we explore how many people will be affected and the proactive steps you can take to limit the impact.

What's changing?

From April 2027, unspent pensions will count towards the value of your estate for IHT purposes.

This means unused defined contribution (DC) pensions will be considered when calculating a possible IHT bill. This includes funds that are in pension drawdown, but not payments from annuities. 

The same goes for lump sum death benefits from a defined benefit (DB) pension. 

Where a DB pension pays a regular income to a spouse or civil partner after your death (known as a dependants’ scheme pension), this will remain exempt.

• Find out more: will my pension be subject to inheritance tax?

How many estates will be affected?

The new rules will leave more families facing a bill, but they will remain in the minority – the Office for Budget Responsibility (OBR) estimates that the proportion of deaths triggering an IHT bill will rise from 5% in 2022-23 to 10% by the end of the decade.

Nonetheless, 39% of respondents in our June 2026 member survey said they were concerned about the imminent changes, and 25% said the new rules were likely to affect their estate planning. 

The impact will undoubtedly be significant for some, with 67,000 families facing an IHT bill by 2029-30.

The government estimates that in 2027-28, 10,500 estates that wouldn't otherwise have owed tax will become liable, and another 38,500 estates will owe an extra £34,000 on average.

Five steps to consider

Whether you want to avoid an IHT bill altogether or negotiate the process as well as possible, here are five things to think about before the rules come into effect. 

1. Start spending more of your pensions

The first thing you might consider doing is using your pension savings for their original purpose – to fund your later years once you leave the workplace. 

In the past, people tended to save pensions until last and spend taxable cash or Isas first. Now, drawing on your pensions during your lifetime to pay for both day-to-day expenses and some treats can reduce the taxable size of your estate

Spending more of your pensions in retirement is a relatively simple way to reduce the value of your estate, but you’ll need to be careful to avoid running out of money too early. 

Behaviour has started to change. In a June 2026 survey of Which? members, 20% of those who said the new rules would affect their estate planning are already spending more of their retirement savings, while 58% plan to do so. 

• Find out more: how much will I need to retire?

2. Calculate your income tax

If you're withdrawing more money than expected to pay for your retirement, make sure the strategy doesn’t just replace one type of tax with another.

Spending more of your pension can mitigate against IHT, but you’ll still need to be mindful of the income tax due on the amount you withdraw. 

You can take 25% of your pension tax-free, but the rest is taxed in the same way as income – and large withdrawals from your retirement savings can push you into a higher tax bracket. 

Plus, with income tax thresholds frozen until 2030-31, it will mean retirees paying more tax on their pension income.

The personal allowance will remain at £12,570 and the higher-rate threshold at £50,270 until at least 2031. This means pension income can rise while the tax bands don't move with it, potentially pulling more of your retirement income into tax over time.

• Find out more: can I take a lump sum from my pension?

3. Get your pension admin in order

Even if you don’t spend all of your pensions, the eventuality that your beneficiaries will face an IHT bill is hopefully a way off.

However, there are things you can do now to make the process easier when the day comes. The new rules could make sorting out a pension more complicated for the family left behind.

Guidance from HMRC shows that where IHT may be due, pension schemes could be instructed to withhold up to half of a beneficiary's pension death benefits while the tax position is worked out. Families will be required to bring together information about pensions and the wider estate to figure out what's owed.

Good record-keeping is more important than ever. Keep track of where your pensions are, make sure your family can find them and check that your beneficiary nominations (such as expression-of-wish forms) still reflect your wishes.

• Find out more: how to find old pensions?

Help with inheritance tax

Our money guidance team has decades of experience in inheritance tax and estate planning. As a Which? Money member you get unlimited access to them via phone included in your subscription.

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4. Plan as a couple – but account for other eventualities

It's natural to plan financially as a couple, but circumstances may change. 

You should record everything individually – for example state pension, workplace pensions, private pensions, proposed retirement dates – and then bring it all together. This means documenting what each person receives and when they will receive it. 

What happens if one person retires several years before the other and, although it's a grim thought, what would the position be if one partner dies? Divorce among older people is also on the rise and will bring its own set of complications. 

With the treatment of inherited pensions due to change, it's becoming more important to at least consider a less ‘even’ retirement. 

• Find out more: 5 retirement mistakes couples with an age gap should avoid 

5. Accelerate your gifting

There's another, more immediate, option if you want to avoid or minimise the IHT due but have enough funds to live on during retirement. 

By making greater use of the gifting rules for IHT now, you can make sure you don't leave your family with a shock tax bill after you've gone.

Many people know about the £3,000 annual gifting allowance or the seven-year rule, where larger gifts usually become exempt if you survive for seven years. But there's another, lesser-known exemption called 'normal expenditure out of income'.

It allows some regular gifts made from your surplus income to be immediately exempt from IHT, provided they meet HMRC's conditions.

The gifts must be made from your regular net income rather than your savings or other capital. Income can include your salary, pension, rental income, dividends and savings interest.

A Which? member has shared his experience of taking money from pensions to gift from excess income now, staying below the higher-rate tax threshold and paying a blended income tax rate of around 15%, compared with a possible IHT charge of 40%.

• Find out more: how regular gifting can reduce your inheritance tax bill