From 6 April 2027, unused pension pots will become liable for Inheritance Tax (IHT).

With the change announced in the 2024 Autumn Budget, MoneyWeek reports that the number of people rushing to access their pension lump sum as soon as possible reached its highest level in five years.

The decision on when to withdraw your pension lump sum should never be rushed. Withdrawing funds from your pension requires careful consideration and planning.

Read on to learn more about the new rules for IHT and pensions, and explore the pros and cons of taking your tax-free lump sum early.

Pensions will be included in estates from April 2027

Before April 2027, funds held in a pension are excluded from estate valuations. This has historically made pensions an effective tool for mitigating IHT, with many people using up other savings before withdrawing from their pensions.

However, under the new rules, money left in your pension when you die will count towards the value of your estate. If your estate exceeds your tax-efficient allowance (known as your “nil-rate band”), the portion above the threshold is usually taxed at 40%. In 2026/27:

  • Your standard nil-rate band is £325,000
  • You may also have a residence nil-rate band of up to £175,000 if you leave a primary residence to a direct descendant
  • Spouses and civil partners can share their nil-rate bands, meaning some couples could pass on up to £1 million before triggering an IHT bill

HMRC estimates this will see 10,500 more deaths trigger an IHT charge, while 38,500 will face higher bills than previously.

You can currently access your pension lump sum from age 55

In 2026/27, you can claim up to 25% of your pension pot as a tax-free lump sum. This is capped at the £268,275 Lump Sum Allowance (LSA).

The remaining 75% of your fund is subject to Income Tax at your marginal rate.

You can currently start withdrawing funds from your pension at age 55. However, this is rising to 57 from April 2028.

You can take your lump sum as a single, one-off payment, or spread your tax-free amount across multiple withdrawals.

4 pros of taking your lump sum early

There are a few reasons you might consider taking your tax-free lump sum at the earliest opportunity, even if you’re not planning to retire straight away.

1. You can take steps to remove the funds from your estate

Once the money leaves your pension, you can start removing the funds from your estate to shield them from IHT, such as by:

  • Gifting the money to loved ones
  • Placing funds in trust
  • Spending the money

Keep in mind that all the above are generally irreversible. As such, it’s important to consult with a financial planner before acting.

2. You could pay off your mortgage or other debts before retirement

Taking your lump sum early could enable you to pay off any outstanding mortgages or other debts.

However, if the funds are growing at a higher rate than the interest accruing on your debts, it may not be efficient to take your lump sum early. Speak to a financial planner for support with calculating the most cost-effective approach for your circumstances.

3. You can support loved ones sooner, rather than later

As mentioned above, you might be able to gift some or all of your lump sum to loved ones. Not only could this reduce your estate’s IHT liability, but it also allows them to start benefiting from your gift sooner.

As a result, they may be able to reach key milestones sooner – such as funding a wedding, buying their first home, or starting a business. Plus, by gifting during your lifetime, you can enjoy those milestones with them.

4. You could make the most of the funds earlier in life

Taking your lump sum early could give you more freedom to enjoy spending sooner, whether that’s while you’re still working or in early retirement.

For example, you might wish to take a bucket-list holiday while you’re in good health or make some home renovations. You might even be hoping to take a sabbatical from work and enjoy a “golden gap year”.

4 cons of taking your lump sum early

It’s important to understand that there could be significant downsides to removing funds from your pension early.

1. Your lump sum may still be liable for Inheritance Tax when you die

Taking funds out of your pension pot won’t automatically mean they’re exempt from IHT.

As mentioned above, you’ll need to take steps to remove the assets from your estate if you’re hoping to mitigate an IHT bill. In some cases, these won’t be effective immediately. For example, gifts that don’t qualify for an exemption generally remain part of your estate for seven years after you make the gift

2. You might lose out on the funds’ growth

Your pension pot is generally invested and grows tax-efficiently with compound returns.

Removing your tax-free lump sum would limit your pot’s growth potential. For example, if you take a £100,000 lump sum at 55 and retire at 65, your fund could lose out on £62,890 in growth over those 10 years, assuming a 5% growth rate.

As such, before taking your lump sum, it’s important to consider the true cost to your pension pot – including compound growth.

3. Your money’s growth could become taxable

Saving and investing the funds outside of a pension could see your money’s growth subject to tax.

In 2026/27, you can use ISAs to save and invest up to £20,000 a year without being taxed on growth. Funds held outside of an ISA may be subject to Income Tax, Dividend Tax, and Capital Gains Tax (CGT).

Not only could HMRC claim a portion of your money’s growth, but the funds would still form part of your estate for IHT purposes.

Read more: How to protect your savings from a rising tax liability

 4. Your retirement income could fall short of your goals

Finally, removing 25% of your pension pot as a lump sum could have a significant impact on your lifestyle in retirement.

Without careful planning, you could be unable to afford the retirement you’re hoping for. In the worst-case scenario, you could end up running out of money altogether.

To enjoy your retirement comfortably and without money worries, you ideally want to know you can draw a sustainable income that aligns with your goals. Before taking your lump sum, it’s therefore important to fully understand the impact on your retirement.

Get in touch

Withdrawing money from your pension – whether it’s a lump sum before retirement, or a regular income during retirement – requires comprehensive planning.

Our financial planners can help define a retirement plan tailored to you. Taking your current and future needs into account, and evaluating your full financial circumstances, we can help you define a tax-efficient strategy for your lump sum.

Email info@doddwealthcare.co.uk or call 01228 530913 / 01768 864466 to learn more about how we can help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.