Unused pensions are due to enter inheritance tax calculations from April 2027. But withdrawing or giving away money can create other costs.
Tom WhitfieldPersonal finance reporter
Unused pension savings will count towards inheritance tax from April 2027, according to Which?, potentially bringing estates that currently fall below the tax threshold into scope. Before taking money out or increasing gifts to family, you need to weigh the possible inheritance tax saving against income tax and your own retirement needs.
In its report published on 5 October 2026, Which? says the change will cover unused defined contribution pensions, including money remaining in drawdown. These are pensions built from contributions and investment returns, rather than a promise to pay a particular retirement income.
Lump-sum death benefits from defined benefit pensions will also be included, the publication reports. However, it says annuity payments are outside the change, as is a defined benefit scheme's continuing pension paid to a surviving spouse or civil partner.
The government estimates quoted by Which? put the first-year impact at 10,500 estates becoming liable for inheritance tax in 2027-28 that would otherwise have paid none. A further 38,500 estates already within the tax system are expected to owe an additional £34,000 on average.
Those figures describe two different effects: crossing the tax threshold for the first time, and increasing an existing bill. Neither means every pension will suffer a 40% charge, because the available allowances, exemptions and other assets still determine whether tax is due.
Which? explains that pensions have generally sat outside inheritance tax calculations. That has made them different from assets such as cash savings and property, and encouraged some retirees to spend other savings first while preserving their pension for beneficiaries.
The standard nil-rate band is £325,000 per person. Inheritance tax is normally charged at 40% on the taxable amount above the available allowances, rather than on the whole estate once it crosses a threshold.
A further residence nil-rate band of up to £175,000 can apply when a qualifying home passes to direct descendants, including children or grandchildren. Together, the two allowances can provide £500,000 of cover, but that is not an automatic entitlement for everyone who owns a home.
The residence allowance is reduced by £1 for every £2 an estate exceeds £2m. Including pension wealth can therefore matter not only because it adds assets to the calculation, but because a larger estate can lose some or all of this additional allowance.
Transfers to a spouse or civil partner are generally exempt, and unused allowances can usually transfer to the survivor. As Which? explains, this can allow a qualifying couple to pass on up to £1m tax-free; unmarried partners do not receive the same spouse exemption or transferable allowances.
Withdrawing money and leaving it in your bank account does not remove it from your estate. Spending it reduces what remains, while giving it away brings the separate gifting rules into play; neither should be confused with simply changing where the money is held.
Pension withdrawals also have their own tax treatment. You can usually take up to 25% tax-free, subject to the applicable limits, while the taxable portion is added to your other income; a large withdrawal can therefore move some income into a higher tax band.
Which?'s June 2026 member survey found that 39% of respondents were concerned about the pension changes, while 25% expected them to affect their estate planning. These are findings about its members, not a measure of how many UK estates will ultimately owe tax.
Among respondents who expected their planning to be affected, 20% said they were already spending more retirement savings and 58% planned to do so. Which? presents increased pension spending as one option, but warns against using up funds too early.
The publication also highlights a member who was drawing pension income to make gifts, reporting an effective income tax rate of around 15% rather than a possible inheritance tax charge of 40%. That is an individual experience, not a rate available to everyone or proof that taking a large pension lump sum is worthwhile.
The exemption discussed is for normal expenditure out of income. Qualifying gifts must come from income rather than capital, form part of normal spending and leave enough income to maintain the donor's usual standard of living; pension income can qualify, but withdrawals should not automatically be assumed to meet those conditions.
Administration is another part of the change, not just the size of the eventual bill. HMRC guidance described by Which? says pension schemes could be instructed to withhold up to half a beneficiary's pension death benefits while a potential inheritance tax liability is established.
That withholding is not a separate 50% tax rate. It means beneficiaries may not receive all the expected money immediately, while those handling the estate bring together pension information and details of other assets to establish what is owed.
Looking further ahead, the Office for Budget Responsibility forecast cited by Which? puts the share of deaths resulting in inheritance tax at 10% by the end of the decade, compared with 5% in 2022-23. Which? also reports that 67,000 families are expected to face a bill in 2029-30; this is the broader inheritance tax picture, not a count of families affected only by pensions.
The report gives April 2027 as the start date, rather than a deadline by which everyone must withdraw or gift savings. As implementation approaches, our inheritance tax coverage will help you follow developments affecting estate calculations and the process families will need to manage.
A pension that once sat outside your inheritance tax calculation could change both what your family receives and the work involved in settling your estate. But reducing a future tax bill should not leave you short of retirement income or create an avoidable income tax charge today. The useful starting point is a complete picture of your assets, allowances and spending needs, backed by pension records your family can find.
According to Which?, unused defined contribution pensions, including drawdown funds, will enter inheritance tax calculations from April 2027. Whether tax is payable depends on your estate's value, available allowances and exemptions.
Which? says defined benefit lump-sum death benefits will be included. A continuing scheme pension paid to a surviving spouse or civil partner will remain exempt.
The standard allowance is £325,000. A qualifying home left to direct descendants can add up to £175,000. Married couples and civil partners may pass on up to £1m using transferable allowances, subject to the relevant conditions.
Not automatically. Withdrawals can trigger income tax, and money kept in a bank account still forms part of your estate. Spending or gifting also needs to be balanced against having enough money for retirement.
Regular gifts from surplus pension income may qualify for the normal expenditure out of income exemption. They must meet the conditions, including leaving enough income to maintain your usual living standard. Pension withdrawals can still incur income tax.
Larger outright gifts generally fall outside your estate for inheritance tax if you survive seven years after making them. Separate exemptions include the £3,000 annual gifting allowance and qualifying regular gifts from surplus income.
HMRC guidance described by Which? says schemes could be instructed to withhold up to half a beneficiary's pension death benefits while a potential inheritance tax bill is established. This is not a separate 50% tax charge.
This article is general information, not financial or legal advice. Speak to a regulated adviser about your circumstances.
