Chancellor Rachel Reeves wants you to spend your pension in your lifetime rather than pass it on – that much is clear from last month’s Autumn Budget. Inheritance tax (IHT) will apply to pension pots from April 2027, so the focus for people whose estate risks falling into the IHT net will shift from preserving their pensions to spending or gifting the money.
There could be multiple ways to go about this, depending on your circumstances and on the details of the final legislation. For example, a very efficient option could be gifting your 25 per cent tax-free lump sum – you withdraw the money free of income tax, and as long as you live for seven years after making the gift, IHT does not apply either.
But you could also make gifts from your pension income, especially if you have exhausted the tax-free lump sum. Income tax still applies, but as long as the gifts are regular and do not impact your standard of living, they will be free of IHT and the seven-year rule will not apply.