Should You Take Money Out of Your Pension Before April 2027?
— David Gregory, DipPFS
Lots of people are taking money out of their pensions early because of the April 2027 inheritance tax change. Here's when that helps, and when it simply swaps one tax for another.
The short answer
From 6 April 2027, most unused pension funds will count towards your estate for inheritance tax. That's led to a rush of people drawing money out early. For many of them, it won't save any tax at all.
Simply withdrawing money and keeping it in the bank often leaves your family no better off once income tax and inheritance tax are both counted. The money is still in your estate, you've usually paid income tax to get it out, and you've lost the investment growth and flexibility the pension gave you. Withdrawals tend to help when the money is spent, given away, or taken at a lower tax rate than your beneficiaries would pay.
What changes in April 2027
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be included when working out inheritance tax. The change became law in the Finance Act 2026, and the Budget on 28 October 2026 didn't alter it. There are exceptions, including qualifying death in service benefits and dependants' scheme pensions.
A few things don't change:
- Anything left to a spouse or civil partner is still free of inheritance tax.
- The nil rate band of £325,000 and the residence nil rate band of £175,000 stay frozen until April 2031.
- If you die before 75, your beneficiaries can usually draw the pension free of income tax. If you die at 75 or over, they pay income tax at their own rate on what they draw.
So for a family already above the nil rate bands, a pension that used to sit outside the inheritance tax net could now face tax at 40%. Where death is after 75, there's income tax on top for the beneficiary.
Why taking it out often doesn't help
Here's a simple example. Say you're a higher rate taxpayer and you take £50,000 out of your pension, on top of your tax free cash, and all of it falls in the 40% band.
- Take it out and keep it. You pay £20,000 in income tax, leaving £30,000. That £30,000 sits in your bank account, so it's in your estate. Inheritance tax at 40% leaves your family £18,000.
- Leave it in the pension. If you die after 75, the £50,000 faces 40% inheritance tax, leaving £30,000. Your beneficiary then pays income tax as they draw it. If they're also a higher rate taxpayer, that's 40%, which leaves £18,000.
It's the same result. The difference is that in the second case the money stayed invested, you kept your options open and you still had it if you needed it.
It can be worse than that. A larger withdrawal in one tax year can push you into a higher band, and income between £100,000 and £125,140 loses the personal allowance, which works out at an effective rate of 60%. Cash held outside an ISA also earns interest that will be taxed more heavily from April 2027, as we cover in our guide to the savings tax rise in April 2027.
The example is deliberately simplified. It assumes higher rate tax throughout, death after 75, an estate already above the nil rate bands and no other exemptions.
When drawing more from your pension can make sense
Withdrawals do help when the money genuinely leaves your estate, or when you can take it at a lower tax rate than your beneficiaries would pay. The main situations we see are:
- Gifts out of surplus income. Regular gifts made from income you don't need to maintain your normal standard of living are immediately outside your estate. Regular pension income can support this. Tax free cash is capital rather than income, though, and gifts funded from withdrawn capital don't qualify just because they're regular. The gifts need to be a pattern, affordable from genuine income and properly recorded.
- Larger gifts you can afford to make. A gift of capital will normally fall outside your estate after seven years. Gifts made within seven years of death may use up your nil rate band or create an inheritance tax liability.
- Using your basic rate band. If your income is low, drawing enough each year to use your basic rate band means paying 20% now, which may be less than your beneficiaries would pay later.
- Your tax free cash. You can usually take 25% of your pension tax free, normally up to the £268,275 lump sum allowance unless you have protection. Taking it early and gifting it can reduce the estate without an income tax cost, although it then no longer grows tax free in the pension.
- Spending it. If you were going to spend the money anyway, on travel, helping with a house deposit or school fees, drawing on the pension for it rather than other savings can be sensible.
The things to check before you withdraw
- Your own retirement. The first job of your pension is to fund your life. Cash flow planning helps you see what you can afford to give away without running short.
- The money purchase annual allowance. Taking taxable income flexibly usually limits tax efficient contributions to defined contribution pensions, including employer contributions, to £10,000 a year. Taking only your tax free cash doesn't trigger it.
- Who inherits. Pensions left to a spouse or civil partner are still free of inheritance tax, so for many couples the bill only arises on the second death.
- Your nominations. Make sure your expression of wishes is up to date, as the change makes it more important who receives the pension.
- Life cover in trust. Rather than reducing the pension, some families take out whole of life cover written into trust to pay the bill. Premiums depend on your health and age, and the cover usually needs to be kept up for life, so it isn't right for everyone. See our guide to whole of life cover and Rysaffe trusts.
Our pension IHT countdown checklist and our guide to planning for the pension inheritance tax rules go into more detail. You can also estimate your position with our IHT calculator.
Frequently asked questions
Should I take money out of my pension before April 2027 to avoid inheritance tax?
Not necessarily. Withdrawing money only reduces inheritance tax if it then leaves your estate, through spending or gifts. Money withdrawn and kept in the bank is still taxed on death, often after you've already paid income tax on it.
Are pensions subject to inheritance tax from April 2027?
Yes. For deaths on or after 6 April 2027, most unused pension funds and death benefits count towards the estate for inheritance tax, under the Finance Act 2026. Pensions left to a spouse or civil partner remain exempt.
Can I give away my pension tax free cash?
Yes. You can usually take 25% of your pension tax free, up to £268,275, and gift it. The gift normally falls outside your estate if you survive seven years, unless it qualifies for another exemption.
Does gifting from pension income count as a gift from surplus income?
It can. Regular gifts made from pension income you don't need for your normal standard of living are exempt straight away. Tax free cash and other capital withdrawals don't count as income for this purpose, and the gifts should be regular and well recorded.
What happens to my pension if I die before 75?
Your beneficiaries can usually draw it free of income tax. From April 2027 the pension may still count towards your estate for inheritance tax, unless it passes to a spouse or civil partner.
Does taking my tax free cash affect how much I can pay into a pension?
No. Taking only your tax free cash doesn't trigger the money purchase annual allowance. Taking taxable income flexibly usually does, limiting future defined contribution pension contributions, including employer contributions, to £10,000 a year.
How we can help
Whether to draw on your pension early depends on your income, your estate, who you'd like to benefit and what you need for your own retirement. If you'd like to talk it through, book a free consultation and we can take it from there.
DISCLAIMER: This article reflects our understanding of the rules as at November 2026. It is general information, not personal advice. Tax treatment depends on individual circumstances and may change. The value of investments can fall as well as rise and you may get back less than you invested. Inheritance tax planning and estate planning are not regulated by the Financial Conduct Authority.