, October 2026 edition

For years, pensions have been one of the most tax-efficient ways to pass wealth on. From 6 April 2027, that changes.

In our April edition, we looked at why more families are being pulled into inheritance tax. Pensions were one of the reasons. Since then, the rules have been confirmed in law, and the detail matters.

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will count towards your estate for inheritance tax. For some families, this doesn't just add tax. It changes the order in which you should spend your money in retirement.

What's actually changing

What stays the same:

• Pensions left to a spouse or civil partner remain free of inheritance tax
• Death-in-service benefits from a registered pension scheme are excluded
• Your personal representatives will be responsible for reporting and paying any tax due

The double tax problem (after 75)

This is the part many people miss. If you die after age 75, your beneficiaries already pay income tax on anything they draw from an inherited pension, at their own rate. From April 2027, that pension may also have faced inheritance tax first.

• 40% inheritance tax on the fund
• Then income tax on what's left when your children or grandchildren draw it

For a beneficiary who is a higher-rate taxpayer, more than half the pension could go in tax.

Why this turns retirement planning on its head

Until now, the standard approach for many people has been: spend your ISAs and savings first; leave your pension until last, because it passes on tax-efficiently. From April 2027, that logic no longer holds for everyone.

For some families, it may now make more sense to:

• Draw more from the pension during your lifetime, within sensible tax bands
• Keep ISAs and other assets for later, or for passing on
• Use pension income to fund gifts to the next generation

There's no single right answer. It depends on the size of your estate, your health, your income needs, and who you want to benefit.

So, who is actually affected?

Family home£450,000 Pension£400,000 Savings and ISAs£150,000

For a married couple passing everything to the second spouse, then on to children, this sits right at the edge of the combined £1 million threshold. Add a few years of property and pension growth, with thresholds frozen until 2031, and part of that estate could face 40% tax. For single people and unmarried couples, the threshold is reached much sooner.

What can you do about it?

1. Review your expression of wishes. Check who your pension nominations name. Outdated forms are one of the most common problems we see.
2. Rethink your withdrawal order. Look again at which pots you draw from first. Small changes now can make a large difference later.
3. Gift from surplus income. Regular gifts from income that don't affect your standard of living are immediately outside your estate, with no seven-year wait. Pension income can count, if it's properly documented.
4. Consider life cover written in trust. For some families, a whole-of-life policy written in trust is a cost-effective way to cover a known inheritance tax bill.
5. Don't panic-withdraw. Taking large lump sums to "get it out before 2027" can trigger a large income tax bill and solve nothing. Planning beats reacting.

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Most of us spend 40 years building a pension. Hardly anyone spends 40 minutes planning how to spend it.

Yet turning a pension pot into a reliable income for 25 or 30 years is one of the hardest financial problems you'll ever face. It's harder than building the pot in the first place. When you're working, your salary arrives every month. In retirement, you become your own payroll department.

The question that matters

It isn't "How much have I got?" It's: "How much can I safely take, every year, for the rest of my life, without running out?" The answer depends on far more than the size of your pot.

Your starting point: the State Pension

The State Pension rises each year, and it's guaranteed for life. Here's the detail many people miss: because it uses up almost all of your Personal Allowance, nearly every pound you draw from your private pension is taxed.

The building blocks of retirement income

1. Tax-free cash. You can usually take 25% of your pension tax-free, up to £268,275 for most people, all at once or in stages. Taking it in stages often works better, because each withdrawal is part tax-free and part taxable.
2. Pension drawdown. Your pension stays invested, and you draw an income as you need it. Flexible, but you carry the investment risk.
3. Annuities. You swap some or all of your pension for a guaranteed income for life. With interest rates higher than they were a few years ago, annuity rates have improved, and they're worth looking at again.
4. ISAs and investments. Withdrawals from ISAs are tax-free and don't count as income. Used alongside a pension, they help you manage your tax bill year by year.
5. Cash reserves. A cash buffer, often one to two years of spending, means you don't have to sell investments when markets fall.

What different pot sizes can mean

Illustrations only. Your own figures will depend on your circumstances.

The biggest risk: sequencing

Two people retire with identical pots and take identical income. One sees markets rise in the first few years. The other sees markets fall. Even if average returns over 25 years are the same, the second person can run out of money years earlier. Selling investments to fund income while prices are low locks in losses that never recover.

This is called sequencing risk, and it's the main reason a cash reserve and a withdrawal plan matter so much. A sustainable plan usually includes:

• A cash buffer to draw from in poor years
• Flexibility to take a little less when markets are down
• Regular reviews, at least once a year, to adjust

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Most people think about their finances in March, just before the tax year ends. By then, many of the best options have gone.

With the Budget on 28 October and big changes arriving in April 2027, the last three months of 2026 are a good moment to get ahead. Here are six things worth checking before the end of the year.

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