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Part of:
Best Pensions and Retirement UK 2026
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By Chandraketu Tripathi · Updated April 2026 · Fact-checked Pensions · April 2026Chancellor Rachel Reeves has introduced the most significant pension tax reforms in a decade. The headline change — including unused pension pots in inheritance tax from April 2027 — affects millions of pension savers who have used their pension as a wealth transfer vehicle. Here is a complete breakdown of every pension tax change announced and what it means for your retirement planning.
Pension IHT — The Biggest ChangeFrom 6 April 2027, most unused defined contribution pension funds and pension death benefits will be included in the deceased's estate for inheritance tax purposes. Under current rules, DC pension pots pass outside the estate at the trustees' discretion — making them one of the most tax-efficient assets to pass on. From 2027, this advantage is removed. Government estimates suggest 10,500 estates per year that would not previously have paid IHT will now become liable, and 38,500 estates will face higher IHT bills. The average additional IHT per affected estate is estimated at £34,000. Critically, inherited DC pensions also face income tax when drawn — creating a potential combined rate of 64-67% on inherited pension wealth for higher-rate taxpayer beneficiaries. What Should Pension Savers Do Now?Review whether your pension was being preserved primarily for inheritance rather than retirement income — if so, your strategy needs to change. Consider drawing down more pension income during your lifetime and either spending it or making lifetime gifts. Consider whether nominating grandchildren (rather than children who may have their own large estates) reduces cumulative IHT exposure across generations. Review whether an annuity — which is outside the pension IHT scope — becomes more attractive for part of your pot. 💡 The window before April 2027 is limited — but there are meaningful steps to take now. Drawing tax-free cash (up to 25% of your pension, capped at £268,275) from your pension before the IHT change reduces the taxable pot. Gifting tax-free cash and surviving 7 years removes it from your estate entirely. Seek regulated financial advice before making any changes — individual circumstances vary significantly. Salary Sacrifice — April 2029 ChangeFrom April 2029, the NI relief available to both employees and employers through salary sacrifice pension contributions will be limited to £2,000 per person. This primarily affects higher earners making large salary sacrifice pension contributions. The change is designed to make the tax relief less regressive — currently higher earners receive proportionally more benefit from salary sacrifice NI exemptions. ⭐ OUR VERDICT Rachel Reeves's pension reforms represent the most significant changes to pension taxation in a decade. The pension IHT change from April 2027 is the most urgent for estate planning — affecting anyone who intended to pass their pension pot to children or grandchildren. The salary sacrifice change from April 2029 is less immediate but affects high earners' contribution strategies. For most retirement savers, the fundamental principle remains: pensions are still highly tax-efficient for retirement income, even if less so for wealth transfer. Seek regulated financial advice specific to your pension structure and estate. Frequently Asked QuestionsWill my pension be taxed on death from 2027? From 6 April 2027, most unused defined contribution pension pots will be included in your estate for IHT at 40% above the nil-rate band. Pensions passing to a surviving spouse or civil partner remain exempt. Beneficiaries will also pay income tax on inherited pension funds when they draw them down. Does the pension IHT change affect defined benefit pensions? Both defined benefit (DB) and defined contribution (DC) schemes are affected, though in different ways. For DB schemes, lump sum death benefits will be included in the IHT assessment. Ongoing spouse's pensions from DB schemes are typically exempt. The practical implications for DB members are often less severe than for large DC pots — check with your scheme administrator. Should I draw my pension faster because of the IHT change? For some people, drawing pension income earlier and making lifetime gifts or spending the proceeds makes more financial sense than preserving the pot for inheritance from April 2027. However, drawing pension income has income tax implications. Individual circumstances vary — take regulated financial advice before changing your drawdown strategy. What is the pension annual allowance in 2026? The pension annual allowance — the maximum you can contribute to pensions in a single tax year and receive tax relief — is £60,000 for most people in 2026/27. High earners with adjusted income above £260,000 have a tapered annual allowance that can reduce to a minimum of £10,000. The money purchase annual allowance (MPAA) of £10,000 applies if you have flexibly accessed your pension. |
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