October 22, 2025

When most people think about inheritance tax, they focus on property or investments. But from October 2027, pensions will also be included in your estate for inheritance tax (IHT) purposes. That’s a big change.

Currently, your pension sits outside your estate for IHT. This has made pensions one of the most effective tools for passing on wealth tax-free. But that’s about to end.

From 2027, any pension money left when you die will count towards your estate’s total value. If your estate exceeds your allowances, that pension pot could be taxed at 40%. For many families, that could mean losing £100,000+ unnecessarily.

So what can you do about it?

Step 1: Rethink Your Withdrawal Strategy

Under the old rules, it often made sense to spend other assets first (ISAs, savings, general investments) and leave pensions untouched for as long as possible.

But with pensions being pulled into the IHT net, that approach could be costly.

New strategy:

• Start drawing from your pension earlier, especially tax-free cash.
• Use your Personal Allowance (£12,570) to withdraw tax-free income.
• Combine this with ISAs and investment accounts for blended, tax-efficient income.
• Consider spending pensions first, and preserving other assets that can be gifted or passed on more easily.

This isn’t about rushing to empty your pot. It’s about drawing from the right places at the right time, to enjoy your money while you’re alive and reduce your IHT exposure when you’re not.

Step 2: Reinvest and Gift Strategically

If you’re drawing from your pension but don’t need all the income:

• Use your gifting allowances (like the £3,000 annual exemption, or gifts from surplus income)
• Reinvest into ISAs, Junior ISAs, general investment accounts, or trusts
• Start using Potentially Exempt Transfers (PETs) to pass on wealth early – the 7-year clock starts ticking the moment you gift

You’re not just spending for fun, you’re moving money out of your estate in a structured way.

Step 3: Use Trusts Where Appropriate

Before the rule changes hit, you may still have time to place lump sums into trust. This could:

• Reduce your taxable estate
• Allow you to control how wealth is passed on
• Provide protection for vulnerable beneficiaries

Common options include:

• Discounted Gift Trusts – offer potential IHT savings and income
• Carve-Out Trusts / Lifestyle Trusts – offer a flexible way to structure inheritance. You can “carve out” capital from your estate, retaining access to the capital for income.
• Loan Trusts – preserve access to capital, while moving growth outside your estate

Trust planning isn’t one-size-fits-all. It needs to fit with your wider goals and be reviewed regularly. But done right, it can be an effective way to protect your family’s future.

Step 4: Protect the Problem with Life Cover

If you’re likely to face an IHT bill no matter what:

• Consider Whole of Life insurance, written in trust.
• On death, it pays out a tax-free sum directly to your beneficiaries
• This can cover the IHT bill, so your estate doesn’t need to sell assets or dip into what you planned to pass on
• If Whole of Life Insurance is too expensive, we can recommend a Level Term Policy, however this will end at the specified age. However, we can take necessary steps to reduce your liability up until this date, thus in effect ‘buying planning time’.

With the right blend of early withdrawals, reinvestment, gifting, trust planning and protection, it’s possible to significantly reduce your IHT liability, while still living well and providing for your family.

At Strive, we’re already helping clients adjust their plans to get ahead of the change.

Inheritance Tax Planning, Trusts and Estate Planning are not regulated by the Financial Conduct Authority.

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Strive Financial Planning Ltd is an appointed representative of Quilter Financial Services Limited which is authorised and regulated by the Financial Conduct Authority. Strive Financial Planning Ltd is Registered in England and Wales, No: 16577051. Registered Address: Ingle Dene, Cragg Road, Hebden Bridge, HX7 5EN.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
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The guidance and/or information contained within this website is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.