For years, the advice doing the rounds among people who'd actually built up a decent pension pot was: spend everything else first. Raid the ISA, draw down the cash savings, and leave the SIPP alone for as long as possible. The pension sat outside your estate for inheritance tax purposes — so every pound you left in there was a pound passing to your kids or grandchildren without HMRC taking its usual 40% cut.
It was, quietly, one of the best tax breaks in personal finance. And from 6th April 2027, it's gone.
What's Actually Changing — and Why It's Now Law
The Finance Act 2026 received Royal Assent on 18th March 2026. This isn't a consultation, a proposal, or a Budget rumour. It's done. From 6th April 2027, most unused pension funds — including SIPPs in drawdown — will be counted as part of your estate for inheritance tax purposes.
That means when you die with money left in your pension, it gets added to everything else you own: your house, your ISA, your savings account. If the combined total exceeds the nil-rate band (£325,000, or up to £500,000 with the residence nil-rate band if you're passing a home to a direct descendant), your estate pays 40% IHT on the excess.
For most people, that's the same treatment as any other asset. So why does it hit pension savers so hard?
The Maths That Should Wake You Up
Here's the bit that doesn't get talked about enough. If you die after age 75 with money in your SIPP, your beneficiaries don't just face the 40% inheritance tax hit. When they actually withdraw the money, they also pay income tax at their marginal rate. Put those two together for a higher-rate taxpayer inheriting from a larger estate, and the effective tax rate on that pension wealth can exceed 67 pence in the pound.
The government estimates around 10,500 estates a year will face a new IHT liability they wouldn't have had before. Another 38,500 estates will pay more than they currently do. The average expected increase in the IHT bill? Around £34,000.
Those aren't hedge fund managers. A lot of those are people who diligently saved into a SIPP for 30 years, built up a pot of a few hundred thousand, had a house, some ISA savings — and assumed they'd done everything right.
The Uncomfortable Truth: Many People Were Hoarding, Not Retiring
Let me be honest about something. The pension IHT exemption created a peculiar incentive. A lot of retirees — particularly those with reasonable pension wealth and other assets to live on — weren't spending their pension because they wanted the income. They were not spending it because it sat outside their estate. The longer it stayed untouched, the more it looked like a tax-free inheritance.
This was a legitimate strategy. Financial advisers used it, recommended it, and for good reason — it worked. But Scottish Widows have called the April 2027 change "one of the most consequential changes to pension taxation advisers have had to navigate in over ten years," and it's hard to disagree.
The government's argument is that pension saving should fund retirement, not serve as a multigenerational wealth transfer mechanism. Whether you agree with that or not, the law has changed.
The Counterintuitive Response: Actually Spend Your Pension
Here's the part I find genuinely interesting. Now that the pension no longer has a special IHT status, the rational calculation shifts.
If the money in your SIPP is eventually going to be taxed like any other asset, there's no longer a tax reason to preserve it while spending down your other savings first. For people who don't need to hoard their pension — and plenty of retirees are drawing it down slowly simply out of caution — the maths now argues for spending it more freely during your own lifetime.
Advisers are reportedly seeing exactly this response from clients, particularly those without children. If the residue is heading to HMRC at 40% anyway, earlier travel, earlier home upgrades, and earlier gifting to family or charities start to look considerably more appealing than squirrelling it away for a tax collector.
The Drawdown vs Annuity Decision Has Shifted
There's a ripple effect here that's worth noting if you're approaching retirement.
Before April 2027, keeping a large pot in drawdown was partly attractive because of the IHT advantage. The unspent pot passed outside your estate. An annuity, by contrast, typically dies with you (or with your surviving spouse) — nothing passes to children.
That IHT advantage for drawdown is gone. And annuity rates, it's worth noting, are currently near their highest point since 2015. According to RetirementExpert.co.uk, a level single-life annuity at age 65 pays roughly 7.89% per year at May 2026 rates. The Association of British Insurers reported £7.4bn in annuity sales in 2025 — a record high, driven partly by better rates and partly by people already rethinking the drawdown calculus.
Joint-life annuities, which pay an income to a surviving partner rather than passing an unspent pot, also remain outside the IHT calculation — which makes them look more attractive on inheritance grounds than they did a year ago.
For larger pots, many advisers now recommend a hybrid approach: annuitise enough to cover essential living costs and give you certainty, then keep the rest in drawdown for flexibility. The combination gives you a floor of guaranteed income without leaving everything exposed to whatever the future holds in terms of markets or tax rules.
What Should You Actually Do?
Mark Chicken, a chartered financial planner at The Private Office, puts it well:
"The most important thing here is not to rush into anything. Pensions remain sheltered from inheritance tax between now and April 2027."
That's the right call. There's still time to think clearly, review your position, and make sensible decisions — not panicked ones. Some of his clients have taken out whole-of-life insurance policies written in trust, which can cover the expected IHT bill without requiring any changes to the pension itself. Others are working through whether to change their drawdown strategy or make earlier lifetime gifts to reduce the overall estate.
BDO, the tax advisers, suggest that strategies like gifting earlier, reviewing the order of withdrawals, or annuitising part of a pension pot can all start to make a meaningful difference before the April 2027 deadline.
If you have a significant SIPP and haven't had a conversation with a financial adviser about this yet, now is the time to get that in the diary.
Final Thoughts
From 6th April 2027, unused pension funds are included in your estate for IHT — this is now law following the Finance Act 2026
The effective tax rate on pension wealth left at death can exceed 67% for higher-rate taxpayer beneficiaries of post-75 SIPP holders
Around 10,500 estates per year will face a new IHT bill; ~38,500 will pay more, by an average of £34,000
The incentive to hoard your pension at the expense of spending other assets has largely disappeared — the order of withdrawals deserves a rethink
Annuity rates are near post-2015 highs (~7.89% for a 65-year-old in May 2026) and the relative appeal of drawdown on inheritance grounds has decreased
Don't panic and don't rush — but do review your position with a qualified adviser before April 2027
This article is here to give you some information and is for educational purposes only. It is not meant to give you financial advice. It is always a good idea to chat with a financial adviser who knows you well and can help you make the best decisions for your situation.
Sources
https://www.theinvestorscentre.co.uk/investing/statistics/sipp/
https://www.thehalewoodgroup.co.uk/blog/pension-drawdown-plan-iht-2027-rule-change
https://expertise.scottishwidows.co.uk/tax-year-end/unlocking-the-future-of-estate-planning/
https://pocketwise.co.uk/pensions-and-retirement/pension-iht-changes/
