Don't Raid Your Pension to Dodge Inheritance Tax — Your Future Self Will Pay the Price

HM Treasury's own statement, reported in the MoneyWeek coverage of the HMRC FOI data: "More than 90% of estates each year will continue to pay no inheritance tax after these and other changes."

The actual figure from HMRC inheritance tax statistics is closer to 96%. Only around 27,000 estates per year currently trigger an IHT charge. Even with pensions added to the calculation, HMRC estimates this rises to roughly 38,500 — still just 4% of deaths.

Before you withdraw a penny, ask: is your estate actually above the threshold? The combined nil-rate band is £325,000 per person (£650,000 for a married couple), plus the residence nil-rate band of £175,000 each if you're leaving your home to direct descendants. That's £1 million for a couple before any IHT is due.

With the average UK house price at £299,677 according to Halifax as of March 2026, a couple would need a combined pension of over £700,000 on top of their home before IHT becomes a concern. Most defined contribution pensions in the UK are far smaller than that — the median pot at retirement is around £35,000, according to FCA retirement income data.

If your total estate — including your pension — is below £1 million, the April 2027 changes cost you nothing. The 116,000 people who withdrew at 55 include a significant number who panicked over a tax bill they were never going to face. Our tax planning hub explains the full IHT framework.

Your 25% tax-free lump sum is genuinely tax-free — up to £268,275. Everything beyond that is taxed as income. And income tax rates are brutal if you get the timing wrong.

The personal allowance is £12,570. The basic rate band runs to £50,270. Withdraw £60,000 from your pension in a single year and £47,430 is taxable — £37,700 at 20% (£7,540) and £9,730 at 40% (£3,892). You've just handed HMRC £11,432 to avoid a hypothetical future IHT bill that might never materialise.

Worse, large pension withdrawals can push you above £100,000 of income, where the personal allowance starts to taper. Between £100,000 and £125,140, your effective marginal rate is 60%. A £30,000 withdrawal in that band costs you £18,000 in tax. That's not a typo — the interaction between the personal allowance taper and the higher rate creates a stealth 60% band that catches thousands of people every year.

The optimizer's response is "phased drawdown" — take £12,570 a year within the personal allowance. Fine in theory. But that assumes you have zero other income for the next decade. No state pension (which alone is £12,548 at the full new rate in 2026/27). No part-time work. No rental income. No investment dividends from the ISA you're simultaneously filling. For most people approaching retirement, that pristine zero-income scenario simply doesn't exist.

The people most likely to benefit from early lump sum withdrawal — those with large pensions above the nil-rate band — are precisely the people most likely to have other income sources that make phased drawdown tax-inefficient. If you're earning enough to build a £500,000 pension, you probably have a state pension, possibly a DB scheme, perhaps rental income. Your personal allowance is already spoken for. Our pensions hub covers drawdown strategy in detail.

Life expectancy at 55 is roughly 30 more years for a man, 33 for a woman, according to ONS life expectancy data. That's 30 years your pension needs to fund.

Withdraw £100,000 at 55 and gift it to your children. You've just reduced your retirement income by roughly £4,000 per year (assuming a 4% sustainable withdrawal rate). Over 30 years, that's £120,000 less for you to live on. That £120,000 isn't abstract — it's heating bills in January, care costs at 80, the difference between independence and dependency.

Care costs alone can run to £40,000-£70,000 per year for residential care. The average stay is over two years. A single care episode can wipe £100,000-£140,000 from your savings. That's the £100,000 you gave away to save your children £40,000 in IHT. The maths doesn't work unless you're certain you'll never need care — and nobody can be certain of that.

As Andrew Tricker, the chartered financial planner whose FOI request generated the 116,000 figure, warned: "People are living longer, and health and care costs are very unpredictable in retirement. That is why retirees need a financial buffer. Income is much harder to increase once you stop working."

He submitted the FOI. Even he's telling people to be cautious. That should tell you something. The rush to withdraw isn't being driven by financial planners — it's being driven by headlines. See our savings hub for how to build a retirement buffer outside your pension.

Even after April 2027, the pension wrapper offers advantages no other account can match:

Tax relief on contributions: A higher-rate taxpayer putting £10,000 into a pension gets £4,000 in tax relief. No ISA, no savings account, no investment offers that return. The pension annual allowance of £60,000 means significant contributions are still possible.

Tax-free growth: Investment returns inside a pension compound free of income tax and capital gains tax, just like an ISA. But unlike an ISA, you got tax relief on the way in. That double benefit — relief at entry, tax-free growth in the middle — doesn't exist anywhere else in the UK tax system.

Income tax flexibility on withdrawal: You control when and how much you draw down. With the Bank of England base rate at 3.75% and projected to fall further, keeping funds invested in a pension makes more sense than crystallising them into cash or low-yielding assets outside the wrapper.

Creditor protection: Pension assets are generally protected from creditors in bankruptcy. Money withdrawn and held in a bank account or ISA is not. If you're self-employed or run a business, this protection alone is worth more than any IHT saving.

State pension interaction: Your state pension is £12,548/year at the full new rate. That income already uses most of your personal allowance. Every pound of pension drawdown on top of it is taxed at least 20%. Keeping money inside the pension and drawing strategically around your other income is almost always more tax-efficient than a bulk withdrawal.

Stripping money out of a pension to avoid IHT is like cancelling your home insurance because the premium went up. You're optimising for one specific risk while exposing yourself to a dozen others.

If you're genuinely concerned about the April 2027 IHT changes, here's what actually works without destroying your retirement security:

Check your exposure first. Use HMRC's inheritance tax checker or speak to an IFA. If your combined estate (including pension) is below the nil-rate bands, you don't have a problem to solve. For a couple leaving their home to children, that threshold is £1 million.

Use the pension surplus income exemption. Draw pension income you genuinely don't need and gift it under the "gifts out of normal expenditure" exemption. This is immediately outside your estate — no seven-year wait — but it requires you to establish a pattern of regular gifts from income you can afford to give away. Keep meticulous records; HMRC will ask for evidence.

Maximise spousal transfers. Transfers between spouses are IHT-exempt. If one partner has a larger pension, consider equalising estates to make full use of both nil-rate bands — that's £1 million of IHT-free estate for a couple.

Don't ignore the Money Purchase Annual Allowance trap. Once you take taxable pension income (beyond the 25% tax-free lump sum), your annual contribution allowance drops from £60,000 to just £10,000. If you're still working and your employer contributes to your pension, a premature withdrawal could cost you tens of thousands in future employer contributions and tax relief. This is irreversible.

Take professional advice. This is not a DIY project. The interaction between income tax, IHT, state pension entitlement, and benefit tapers is complex enough that getting it wrong costs more than the tax you were trying to avoid. Our investing hub covers the broader question of where to hold wealth tax-efficiently.

The worst thing you can do is panic-withdraw because a headline told you to.

For the opposing view — that early lump sum withdrawals are a legitimate IHT planning tool — read the case for taking your pension at 55. For a detailed breakdown of how pension drawdown works, see our pension drawdown guide. If inheritance tax planning is your main concern, our IHT planning guide covers all the legal strategies available.

This article is for informational purposes only and does not constitute financial advice. You should seek independent financial advice before making any investment decisions.