What is happening to pensions
From 6 April 2027, unused pension funds will form part of an individual’s estate for inheritance tax purposes.
In my view, this change is intended to bring forward the point at which the Government recovers some of the tax relief previously given on pension contributions.
For many years, pensions have enjoyed favourable tax treatment and became an increasingly attractive vehicle for passing wealth to the next generation. As a result, some retirees treated their pension as the last asset they would ever spend, drawing from ISAs, savings and other investments first.
The proposed inheritance tax changes appear designed to challenge that behaviour. The message seems clear: pensions were intended to fund retirement, not simply to act as an inheritance vehicle.
Behaviour is already changing
From my discussions with clients, the announcement has already started to influence behaviour. More people are considering withdrawing funds from their pensions and passing money to children and grandchildren sooner rather than later.
When pension money is withdrawn, income tax may become payable immediately. If that money is then spent, further tax revenue may be generated through the wider economy.
Simply put, the Treasury receives its share sooner.
There can be very good reasons for making lifetime gifts. Helping children onto the property ladder or supporting grandchildren through education can be enormously rewarding.
However, I believe there is a danger in viewing these decisions through an inheritance tax lens alone.
What is your pension actually for?
Your pension was accumulated to support your retirement. That means more than simply paying the bills. It may fund holidays, experiences, hobbies and the financial freedom you worked hard to achieve.
It also provides flexibility. Unexpected costs arise. Circumstances change. Markets can be volatile and inflation can erode purchasing power.
Most importantly, pensions may provide an important reserve should care or support be needed later in life.
A potential new direction for social care
On 29 September 2026, Andy Burnham announced plans to establish a National Care Service that would provide free personal care based on need rather than ability to pay. The proposals are expected to be introduced in phases over coming years.
This is potentially a significant development. However, it does not remove uncertainty. The eventual scope, timing and implementation of any new system remain important considerations.
Even under a revised care system, individuals may still face costs associated with accommodation, lifestyle choices and additional support.
The danger of focusing on inheritance tax alone
This is where I see the risk. The pension reforms may encourage some people to pass wealth down sooner. At the same time, nobody knows how much money they may need throughout retirement or whether they will require care in later life.
Money gifted away today may be money that is needed tomorrow. The risk is not only care costs. It is losing future choices and flexibility.
Gifts versus care needs
For me, this is the real planning question.
Not:
“How much inheritance tax can I save?”
But:
“How much can I afford to give away or spend, whilst still retaining enough for my own lifestyle, enjoyment and potential care needs?”
The best plans are rarely driven by tax alone. They balance generosity with security by helping family members without compromising your own future.
Before making substantial gifts or withdrawing pension funds, take time to consider the bigger picture. A well-constructed financial plan can help ensure today’s generosity does not become tomorrow’s regret.
