Are you planning to draw from your pension ahead of inheritance tax changes? Consider these 3 things first

For many years, high net worth (HNW) individuals have used private pensions to pass wealth on tax-efficiently to future generations. This is because pension pots are generally exempt from inheritance tax (IHT).

However, from April 2027, most unused private pensions will fall within your estate for IHT purposes. This means they may be subject to the standard 40% IHT rate if your overall estate exceeds certain thresholds.

As such, if you’ve built a substantial pension pot, you might be reconsidering how and when to access your savings. According to Professional Adviser, 15% of HNW over-55s in the UK have already started spending their pension wealth to reduce future IHT exposure.

While this may seem like a straightforward way to protect your estate from a future IHT charge, there are several critical factors to consider before making a decision.

3 important things to consider before accessing your private pensions

Here are three key considerations that could help you decide whether accessing your pensions now will benefit you and your family.

1. Your wider financial plan

At Francis Clark Financial Planning, we take a holistic approach to wealth management. That means we consider your priorities, your philosophy, and your goals to create a bespoke roadmap for the life you want, rather than focusing on isolated issues such as investing or retirement.

HNW individuals typically have complex finances; for example, you might hold wealth across business interests, property, global investments, trust structures and more. As such, pensions are typically a core element of a broader wealth and estate planning strategy – not just a retirement income tool.

So, if you’re thinking about drawing your pension earlier than you planned, you’ll need to consider your entire financial picture.

We can use sophisticated cashflow modelling to show how accessing your pension earlier could affect your wider financial plan and goals, such as philanthropic giving and business succession.

2. Income tax

Pension income is generally taxed in the same way as any other type of income. This means that drawing large lump sums or drawdown withdrawals from your pensions could push you into a higher income tax band.

Moreover, if your income, including pension withdrawals, exceeds £100,000 in a single tax year (2026/27), you may lose some of your personal allowance, further increasing your effective income tax rate. As a result, the potential IHT savings you make by reducing your pension wealth may be offset by a higher income tax bill.

If you decide to start drawing your pension, we can help you structure your income as tax-efficiently as possible. For example, by limiting your pension withdrawals and taking tax-free money from your ISAs to build the income you need without moving into a higher tax band.

3. The money purchase annual allowance

Pensions are one of the most tax-efficient ways to build wealth for the future. Higher and additional rate taxpayers can claim 40% and 45% tax relief, respectively, on contributions. Moreover, any investment growth within a pension is free from income tax and capital gains tax.

Most people can normally benefit from tax relief on contributions up to £60,000 or 100% of their earnings, whichever is lower. This provides high earners a valuable opportunity to build a significant retirement fund.

However, if you’re thinking about dipping into your pension while you’re still working or paying into it, you’ll need to consider the money purchase annual allowance (MPAA).

You can usually take up to 25% from your pension as a tax-free lump sum from the age of 55 (rising to 57 from April 2028). Beyond this, any withdrawals you make from a defined contribution pension will trigger the MPAA, which caps the amount you can contribute to your pension each tax year at just £10,000.

We can help you explore different options for passing on your wealth tax-efficiently

If you’re concerned about the upcoming changes to IHT, we can help you decide whether accessing your pension now is right for you.

Our financial planners can use cashflow modelling to show you how this might affect your financial position in the short and long term.

They’ll also walk you through alternative options for mitigating a potential IHT bill, such as making use of available allowances and tax-efficient wrappers, exploring life insurance solutions, and incorporating charitable giving into your estate plan.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

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.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts or will writing.

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.