Should You Take Out Your Pension Early to Avoid Future Inheritance Tax?

Proposed IHT Changes for Pension Pots

The government has released draft legislation for the upcoming Finance Bill that could bring unused pension pots within the scope of inheritance tax (IHT) starting 6 April 2027.

Naturally, this has prompted many savers to wonder — should I withdraw my pension now to avoid the potential tax hit later?

Before rushing into any decision, it’s important to remember:

• This rule is not yet law.

• Even if approved, it won’t take effect until April 2027.

• The next Budget may introduce further pension changes — but nothing is confirmed yet.

So, there’s no need to act in haste.

When You Can Access Your Pension

Currently, if you have a money purchase pension plan, you can start accessing your pension from age 55. This minimum age is set to increase to 57 on 6 April 2028.

Taking money out before this age is considered an unauthorised payment, which comes with a hefty tax charge of up to 55% — often higher than any IHT you might face later.

If you’ve reached 55, you can usually take out 25% of your pension tax-free (up to £268,275). Any additional withdrawals will be taxed at your marginal income tax rate.

For higher and additional-rate taxpayers, withdrawing funds beyond the tax-free allowance often results in more tax, not less.

Also, once you start flexibly accessing your pension, your future contributions will be capped at £10,000 per year (the current money purchase annual allowance), even if you earn more.

Who Will Benefit from Your Pension?

Before pulling out pension funds just to reduce IHT, consider who inherits your pension when you pass away.

If your spouse or civil partner is the beneficiary, no inheritance tax applies thanks to the spousal exemption.

In such cases, withdrawing funds early could create unnecessary tax liabilities now, rather than saving anything later.

Check the Value of Your Estate

Think about your total estate value — including your pension, property, and savings.
If the total falls within your available nil-rate bands and existing exemptions, there may be no IHT to pay at all.

That means withdrawing your pension early would bring no real benefit, only a potential income tax charge.

Look at the Whole Tax Picture

Don’t focus solely on inheritance tax — assess all potential tax impacts before acting.

Once your tax-free lump sum is taken, further withdrawals are taxable income.
If the withdrawn money stays in your estate, it will still be subject to IHT upon death — whether it’s inside or outside the pension pot.

Some people choose to withdraw funds and gift them during their lifetime:

• Regular gifts from income can qualify for the “gifts out of income” exemption, provided you still have enough income left for your own needs.

• Lump-sum gifts are treated as potentially exempt transfers — meaning you must live seven years from the date of the gift for it to fall outside your estate.

If your income tax rate is below 40%, gifting from withdrawn funds might offer a small tax advantage. But again, it depends heavily on your circumstances — and possible future rule changes.

Final Thoughts

There’s no one-size-fits-all answer. The right move depends on:

• Your age and tax bracket,

• Your estate’s total value, and

• Who will inherit your pension.

With the Budget and legislative changes still uncertain, any decision to withdraw pension funds to “beat IHT” carries a degree of risk.

It’s wise to wait for more clarity and seek professional financial advice before making any major moves — especially when it comes to something as valuable as your pension.

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