Kirk Rice Blog

Why “use it or lose it” is becoming the new retirement mantraWritten on June 11, 2026 by Michael Powell

Michael Powell – Financial Planning Partner

Key Points

• From April 2027, most unused pension funds and certain death benefits are expected to fall within the scope of inheritance tax (IHT).
• The changes could affect how annuities and pension-based death benefits are viewed within wider retirement and estate planning.
• Strategies built around keeping pension wealth outside of an estate for inheritance tax purposes may become less effective under the new rules.
• The reforms may change the balance between retirement income planning, flexibility, and passing wealth on to beneficiaries.

Since 2015, UK retirees were quietly encouraged—sometimes unknowingly—to keep their pensions intact for as long as possible. The logic was simple: pensions sit outside your estate, making them one of the most tax‑efficient ways to pass wealth to the next generation.

From April 2027, that logic is being turned on its head.

The rule that changes everything

From 6 April 2027, most unused pension funds will be included in the value of your estate for inheritance tax (IHT) purposes. That means what was once a tax‑sheltered wrapper could now face IHT at up to 40% if your overall estate exceeds the available allowances.

Put simply:

• Before 2027 – pensions are typically outside your estate
• After 2027 – pensions are largely treated like any other asset

This is not a minor tweak. It’s a structural shift designed to stop pensions being used primarily as an intergenerational wealth transfer tool and refocus them on their original purpose: funding retirement.

Why this matters for you

Many investors have followed a familiar playbook:

1. Spend ISAs and cash first
2. Leave the pension untouched
3. Pass the pension on tax-efficiently

That strategy must be reviewed.

Once pensions form part of your taxable estate, leaving large sums untouched could actually increase the tax bill your family faces. In some cases, families could face IHT at 40% on inherited pension wealth that would previously have passed tax-free.

Even more important, pension wealth could be exposed to both inheritance tax and income tax in certain scenarios—further eroding what beneficiaries receive.

The mindset shift: from preservation to purposeful spending

The key implication is behavioural:

Pensions are no longer just a legacy tool—they are a spending tool.

And that leads to two strategic options:

1. Spend it yourself

Using your pension during your lifetime may now be more tax-efficient than leaving it untouched. Drawing income to fund your lifestyle, travel, or later-life care could reduce the size of your estate—and therefore potential IHT exposure.

In other words, enjoying your wealth could also be good planning.

2. Pass it others to spend during your lifetime

Alternatively, you may choose to pass wealth to the next generation while you’re alive—through gifting or structured planning—rather than relying on pension inheritance.

This requires careful balance. Giving assets away too quickly without considering your own long-term needs can create risk. But done properly, it can reduce future tax exposure and provide support when your beneficiaries may need it most.

The risk of doing nothing

The real danger isn’t the rule change—it’s inertia. The government is relying on this to dramatically increase tax revenue as a result.

Many savers still don’t fully understand how pensions work or how to draw from them efficiently, increasing the risk of unnecessary tax costs or poor decisions.

If you continue with the “leave the pension untouched” strategy without reviewing it, you could unintentionally:

1. Inflate your taxable estate

2. Reduce what your beneficiaries receive

3. Lose flexibility over how and when wealth is transferred

Actions

Pensions have rewarded those who did not spend. Going forward, they will increasingly reward those who plan how and when to spend—or deliberately transfer—wealth. Investors don’t need to panic, but they do need to rethink.

The question is no longer:
“How do I preserve my pension?”

It’s now:
“How do I use it most effectively—for me and my family?”

And in many cases, the answer may be surprisingly simple:

“don’t just leave your wealth—live it, or direct it with intention.”

You can get in touch with us at info@kirkrice.co.uk or via our contact us page.

Visit our financial planning page for more financial advisory services.

Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.