Do you want to take your pension out before the inheritance tax rule changes?

In order to prevent their loved ones from possibly inheriting a 40 percent tax bill, over-55s are taking their pensions at record rates

Before you do, take into account these few points.

A new rule that will take effect in April of next year reverses years of advice to spend our pensions last because they could be passed down free of inheritance tax. The majority of unused pensions will be included in the estate for inheritance tax (IHT) purposes starting on April 6, 2027, and they may be subject to a 40% tax.

Many over-55s (the earliest age at which you can currently take your pension) have changed their behavior significantly as a result of the move, taking out more money sooner rather than later, frequently to support younger generations. However, experts advise against making snap financial decisions.

The inclusion of pensions in estate calculations for inheritance tax purposes starting in April 2027 is already changing how clients and advisers approach planning conversations, according to Michelle Holgate, director and wealth manager at RBC Brewin Dolphin.

"There are several crucial factors to take into account, but it makes sense for some retirees to act quickly by taking money out of their pension and giving it to their kids."

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Document pension withdrawals.

According to HMRC, a record-breaking 22.4 billion in taxable payments were taken out of pensions flexibly in the 2025-2026 tax year. The previous fiscal year (20242025) saw an increase of 3.8 billion. Additionally, since 2023-2024, it has increased by 7.1 billion.

Younger generations receive a large portion of this money as gifts from their parents or grandparents. For instance, according to research by estate firm Savills, more than half of first-time buyers received financial assistance from family in 2025, totaling 8.3 billion.

In May 2026, Rathbones conducted a separate survey of 1,010 people and found that slightly more than two thirds (67%) of parents and grandparents who currently pay for private school or university expenses say the inheritance tax change is encouraging them to provide additional financial support during their lifetime.

"Rather than waiting for assets to pass on death, more clients are choosing to help children and grandchildren now, whether that's supporting housing, education, or other financial needs," stated Ross Coombes, senior financial planning director at Rathbones.

In addition to the tax implications, many people are motivated by the opportunity to witness the effects of that assistance throughout their lives."

Considerations for gifting.

One.

Costs of care. Experts advised being realistic about your health and retirement needs before making any decisions so you can budget for the amount of money you will probably require over your lifetime.

If you need to rely on local authority support to cover care costs, giving away lump sums could lead to problems later on. The local government may try to recoup their additional expenses from you or the recipients of the gift due to the regulations on intentional deprivation of capital.

According to Nick Clark, a chartered financial planner at Lubbock Fine Wealth Management, "You may face undue tax liabilities during your lifetime if you make large gifts or spend your tax-free lump sum too quickly. You won't be able to get that money back later in your retirement when you might need it most."

Two. income taxation.

You may have a sizable income tax bill today if you take out large sums from your pension to save your loved ones from having to pay an IHT bill tomorrow.

The remaining amount is added to your other income for that tax year, even tho up to 25% of any withdrawal may be tax-free. According to Sean McCann, a chartered financial planner at NFU Mutual, "some people may have to pay 40 percent (or 45 percent) on some or all the taxable amounts of the pension withdrawal."

Other repercussions of becoming a 40 percent (or 45 percent) taxpayer include a reduction in the tax-free savings allowance from £1,000 to £500 if you become a 40 percent taxpayer and total loss if you move into the 45 percent band, he continued.

A higher tax rate on dividend income (if you have used your £500 annual dividend allowance) and the loss of the marriage allowance (if your spouse or civil partner claimed it) if you are no longer a basic rate taxpayer are some additional ramifications of moving up a tax band.

You start to lose the tax-free personal allowance if your annual taxable income exceeds £100,000 due to the taxable pension lump sum and other income. According to McCann, anything between £100,000 and £125,140 is effectively subject to a 60 percent tax. This is referred to as the "60 percent tax trap."

The Money Purchase Annual Allowance, which limits future gross annual contributions to a maximum of 10,000, will also be triggered if the 25 percent tax-free allowance is exceeded.

Third.

Inheritance tax. One of the most dreaded but poorly understood taxes is inheritance tax. There are a few important things to keep in mind, but it might be worthwhile to consult a professional financial advisor because the regulations can be difficult to understand.

Let's start with the seven-year rule. The 325,000 tax-free allowance is essentially eaten first by lump sum gifts, which stay in the estate for seven years. According to McCann, the reduction if you pass away between the ages of three and seven only applies if you have more than 325,000 gifts. In certain situations, it's also necessary to review previous gifts. It is crucial and sometimes disregarded to make sure the history of gift-giving is thoroughly examined.

Gifts from regular income that don't affect one's standard of living are immediately free of IHT. Many people are purchasing annuities and donating extra money, according to McCann, "in the knowledge they can stop the regular gifts if their circumstances change." However, it's crucial to keep accurate records of the gifts.

Additionally, you can use the annual exemption to carry forward any unused allowance for one year and donate up to £3,000 per tax year. According to Tony Cockayne of the Michelmores law firm's disputed wills and estates team, when used consistently, it can have a significant impact as long as clear records are maintained.

Gifts made during a marriage or civil partnership are exempt, but only up to a certain amount: 5,000 from each parent, 2,500 from each grandparent or great-grandparent, 2,500 between the couple, and 1,000 from anybody else.

Cockayne cautions that delaying the gift until after the ceremony runs the risk of losing the exemption. The gift must be made prior to the ceremony and is contingent upon it happening.