For most of the last decade, the retirement sequencing rule for a certain kind of UK household has been almost mechanical: spend the ISA, spend the cash, spend the general investment account, and leave the pension alone. Not because the pension was a better investment, and not because of any view about markets. Because a defined contribution pension sat outside the estate for inheritance tax purposes, and every other major asset class did not.
That was never a personality trait or a clever trick. It was a direct consequence of a legal fact. A DC pension is held under scheme administrator discretion. The member files an expression of wishes that guides the trustees but does not bind them. That discretionary element is what kept the fund outside the estate — and it is why a £500,000 pot could pass to beneficiaries without a 40% IHT charge, while the same £500,000 in an ISA could not.
From 6 April 2027, that legal fact changes. Unused DC pension funds are brought within the scope of inheritance tax. The change was announced at the Autumn Budget 2024, and the consultation closed in January 2025. What follows is not a new rule of thumb to replace the old one. It is a decision framework for the 50–68 audience with £300k+ spread across wrappers, and a list of questions worth putting to whoever is advising you.
What actually changes, and what does not
The headline is straightforward. From 6 April 2027, the remaining DC pension pot at death is added to the estate value for IHT calculation. If the combined estate — including the pension — exceeds the available nil-rate bands, 40% IHT applies to the excess. The nil-rate band is £325,000 per person, with a residence nil-rate band of up to £175,000 where a main home passes to direct descendants. That gives a combined individual threshold of up to £500,000, or up to £1 million for a married couple who can transfer unused allowances.
Three things do not change, and they matter as much as the headline:
- The income tax treatment of inherited pensions. The before-75 / after-75 rules remain unchanged. Die before 75 and beneficiaries receive the pot free of income tax. Die at 75 or over and withdrawals are taxed at the beneficiary’s marginal rate.
- The spousal exemption. Pensions left to a surviving spouse or civil partner continue to be exempt from IHT. No IHT is due on the first death.
- The treatment of defined benefit pensions and the state pension. DB pensions pay a defined income rather than a transferable pot, and the state pension has no death benefit beyond a limited bereavement payment. Neither is caught by this reform in the way a DC pot is.
So the old rule is not reversed. It is de-rated. The IHT advantage of preserving the pension pot disappears, but the pension still offers tax-free growth within the wrapper, the 25% tax-free lump sum on crystallisation, and the before-75 income tax exemption for beneficiaries. Those are real advantages. They are just no longer unique to the pension in estate terms.
The disagreement you should know about before you act
Here is the uncomfortable part. The two most detailed secondary guides on this reform do not agree on how far it has been locked down.
One states that the reform was enacted in Finance Act 2026, which received Royal Assent in March 2026, and applies to deaths on or after 6 April 2027. The other states that the final rules have not been confirmed and that draft legislation is expected in a Finance Bill before April 2027. The same source notes that the exact mechanism of double taxation relief — where IHT has been paid on a pension and income tax then applies to withdrawals — is not yet confirmed.
That disagreement is not a reason to do nothing. It is a reason to establish, at the start of any adviser conversation in 2026/27, which version of the rules the advice is being modelled against, and what changes if the other version is correct. If you are being shown a projection, ask what legislation date it assumes. If the answer is vague, the projection is not a plan.
The real decision: certain cost versus uncertain charge
The temptation, once the IHT exemption goes, is to invert the old rule: spend the pension first, keep the ISA. That is not what the sources support, and it is not what the arithmetic supports either.
The decision is not “which wrapper is better.” It is a comparison between two different kinds of cost:
- A certain cost now. A withdrawal in 2026/27 triggers income tax at your known marginal rate, in a known tax year, under rules that are already in force.
- An uncertain charge later. The IHT charge you are trying to avoid is 40% of an unknown residual pot at an unknown date, with relief against double taxation still unspecified.
Certainty is being traded for uncertainty. That trade should be priced, not assumed. One source explicitly warns that crystallising a large taxable withdrawal in 2026/27 to move money out of the pension wrapper before the change can lock in income tax that would otherwise have been avoided.
Consider a hypothetical — clearly hypothetical, because the numbers depend entirely on your own position. Suppose a couple has £400,000 in DC pensions, £250,000 in ISAs, and a £450,000 house. Under pre-reform rules, only the ISAs and house count towards the estate: £700,000. With combined nil-rate bands of up to £1 million, there may be no IHT at all. From 6 April 2027, the pension is added: £1.1 million. The excess over £1 million is £100,000, and 40% of that is £40,000. The question is whether withdrawing enough from the pension now to reduce that £40,000 exposure costs more or less than £40,000 in income tax at the couple’s marginal rates. For a higher-rate taxpayer, a £100,000 withdrawal could cost £40,000 in income tax alone — before considering the loss of tax-free growth and the before-75 exemption. The trade is not obviously worth making. It has to be modelled.
That is the whole point. The old rule was mechanical. The replacement is a modelling exercise, and the answer will differ for a single person, a couple, a higher-rate taxpayer, and someone with a DB pension already providing guaranteed income.
What the reform makes more urgent, not less
Two pieces of paperwork move from administrative chore to consequential decision.
The expression of wish form. It always determined who received the pension. Now it also determines which estate the pension lands in. For couples, the spousal exemption makes the reform look harmless on the first death — and worse on the second. The pension does not escape IHT by passing to a spouse. It is deferred into a larger single estate, where it may face IHT when the survivor dies. That reframes the nomination form. It is not a formality. It is the document that decides whether the pension is concentrated in one estate or directed elsewhere.
The wider family paperwork. Lasting powers of attorney, gifting records, and the interaction between your will and your pension nominations are unaffected by the legislative uncertainty. They are also the part most likely to be wrong, and the part where being wrong is not recoverable after death. If the expression of wish form is five years old and names a former partner, or if there is no LPA and no record of gifts made in the last seven years, the IHT reform is not your most pressing problem.
What not to do
The sources are explicit on three points, and they are worth repeating because they cut against the instinct to act aggressively before a deadline.
- Do not rush to withdraw the pension. Taking large withdrawals purely to avoid IHT can trigger significant income tax and leave you worse off overall.
- Do not transfer from DB to DC purely for IHT reasons. The changes affect both DC and DB pensions, so a transfer may not help — and it could mean losing valuable guaranteed income.
- Do not assume the pension is no longer worth contributing to. Tax relief on contributions, tax-free growth, and the 25% tax-free lump sum all still apply. The change affects what happens after you die, not the benefits during your lifetime.
One source also cautions against setting up complex trust structures before the final rules, including any anti-avoidance provisions, are known. That is a cost you may not need to incur.
The adviser conversation
If you are going to model this, the person doing the modelling should be authorised for the activity. The FCA states that nearly all financial service activities in the UK must be authorised or registered, and that the Financial Services Register lists firms and individuals approved for regulated activities. The FCA advises checking the details of any individual carrying out regulated activities on your behalf, including current roles and any disciplinary or regulatory action on their record.
One specific check is worth making. Some firms on the Register are listed as appointed representatives, carrying out activities on behalf of a principal. The FCA warns that if an appointed representative has gone beyond the activities its principal allowed, you may not be protected by the Financial Ombudsman Service or the Financial Services Compensation Scheme if something goes wrong. You can ask the principal to confirm what activities the AR has permission for and how you would be protected.
For the pre-retirement audience, the questions worth asking are not “what should I do about the 2027 change.” They are more specific:
- Which legislation date is this projection modelled against, and what changes if the reform is still awaiting final regulations?
- What is the income tax cost of a withdrawal this tax year, at my marginal rate, compared with the IHT saved on the residual pot?
- How does the spousal exemption interact with our combined estates on the second death?
- What does the expression of wish form currently say, and does it still match the will?
- If double taxation relief is confirmed in one form rather than another, how does that change the recommendation?
These are modelling questions, not product questions. The answers will not be the same for a single person with a £600,000 estate and a couple with £1.2 million spread across two pensions, two ISAs, and a house.
Where this leaves the orthodoxy
The “spend the ISA, keep the pension” rule was a rational response to a specific legal fact. When the fact changes, the rule does not invert. It stops being a rule and becomes one input into a modelling exercise — alongside marginal income tax rates, the before-75 exemption, the spousal exemption, and the paperwork that decides which estate the money lands in.
For a household with £300k+ across wrappers, the useful output of the next twelve months is not a new sequencing rule. It is a set of numbers: the income tax cost of a withdrawal now, the projected IHT charge on the residual pot later, and the difference between the two. If the difference is small, the old rule may still be fine. If it is large, you will want to know before April 2027, not after.
If you are earlier in the process — still deciding what the retirement is for, rather than how to sequence the withdrawals — the question worth asking years before you retire is a different one, and it is covered in The Question You Should Be Asking Years Before You Retire.
FAQ
Does the reform definitely apply from 6 April 2027?
The change was announced at the Autumn Budget 2024 and the consultation closed in January 2025. One retrieved guide states it was enacted in Finance Act 2026 and applies to deaths on or after 6 April 2027. Another states the final rules have not been confirmed and that draft legislation is expected before April 2027. The primary GOV.UK publications did not retrieve for this article. Treat the date as the working assumption and ask your adviser which version they are modelling against.
Will my beneficiaries pay both IHT and income tax on the same pension?
The government has indicated some form of double taxation relief will be provided, but the exact mechanism is not confirmed in the sources reviewed. Where IHT has been paid on the pension, the amount then subject to income tax is expected to be reduced accordingly. The relief softens the combined burden rather than removing it.
Should I stop contributing to my pension?
No source supports that. Tax relief on contributions, tax-free growth within the wrapper, and the 25% tax-free lump sum all still apply. The change affects what happens after death, not the benefits during your lifetime.
Does the spousal exemption still apply?
Yes. Pensions left to a surviving spouse or civil partner continue to be exempt from IHT on the first death. The consequence is that the pension is concentrated in the survivor’s estate, where it may face IHT on the second death.
What about my defined benefit pension?
The reform does not affect DB pensions in the same way as DC pots, because they pay a defined income rather than a transferable fund. One source notes that the government has indicated a multiplier approach may be used to value DB pensions for IHT, but the exact methodology has not been finalised. Do not transfer from DB to DC purely for IHT reasons — the changes affect both, and a transfer could mean losing valuable guaranteed income.
What should I do first?
Check the expression of wish form. It determines who receives the pension and, from April 2027, which estate it lands in. Then check that your will, your LPAs, and your gifting records are current. Those steps are unaffected by the legislative uncertainty and are the ones most likely to be wrong.