The rules don’t change for another year, but they will upend the way that many investors use their pensions — and that will have a knock-on effect for their Isas.
From April 2027, pensions in the UK will no longer be exempt from inheritance tax (IHT). Exemption has been a great perk and encouraged better-off savers to think of their pensions as a wealth transfer tool.
Not any more. Die after April 2027 and your pension pot may be liable to 40 per cent IHT. Bow out before the age of 75 and your beneficiaries can take what’s left tax-free up to £1,073,100 — anything above this is subject to income tax when drawn.
Die after you reach that age and any money they draw will be taxed at their marginal rate. Oh, and your 25 per cent lump sum tax-free perk dies with you, too.
The result is brutal. Say you leave £100,000 in a pension to your son, who earns about £50,000 a year. He wants to take it in two chunks over two years. He could find the pot reduced to £60,000 after IHT — and then, in effect, to £36,000 after income tax. Ouch!
So what does this mean for Isas?
In some respects the two “tax wrappers” are similar. Growth within them is tax-free and both will count towards your estate when it comes to IHT. However, as Isas are funded from post-tax income, your loved ones can draw on your Isa savings without paying income tax.
Under the current regime, if you have sufficient savings in an Isa, you might prioritise drawing more from there than from your pension, considering the pension as the last pot. After April 2027, you should do the reverse, leaving Isas and other saving till last.
So can we draw some tips from all this?
1. Don’t “overfund” your pension pot
If your pension pot will already give you as much as you need in retirement think twice before adding to it (and certainly not automatically at the cost of funding Isas).
2. Consider putting your tax-free lump sum into your Isa
If you’re approaching 75, drawing on savings rather than accruing them and haven’t yet taken your 25 per cent tax-free lump sum, consider setting in train a programme to move this money from your pension to an Isa. You may want to fund one for your spouse, too (on your or their death, Isa savings can in effect pass from one to the other without losing their tax benefits). Over six years you could move £240,000 into your Isas in this way.
3. Rethink your Isa investment strategy
If your Isa money is now your “wealth transfer” money — the pot you hope will become a legacy and that you’ll never touch — make sure your investment strategy is right for it. You can often take more risk with money meant for the longer term than savings you’ll need in the next few years. (A corollary of this is that you might have to reduce the risk on your pension savings.)
4. Think about funding your loved ones’ Isas
The changes to pensions rule will mean some people pay a lot more in IHT on death. That’s encouraging them to give money away early. Most of us don’t know when we’re going to die or how much we’ll need for care support in later life, so we worry about giving away too much too soon. Giving a little each year instead may be a lower-risk strategy. And if it demonstrably comes out of regular surplus income then it doesn’t create an IHT problem. You don’t have to live seven years before it no longer counts in your estate for IHT purposes. This is the “normal expenditure out of income” exemption. If your children or grandchildren aren’t using their full Isa allowance, consider setting up standing orders and helping them to do so.
5. “Money is like manure — spread it”
It’s an old, not particularly funny, adage, but it’s relevant. If we’ve learned anything from the coming rule changes it’s that . . . well, the rules change. Don’t put all your eggs in one tax basket if you’re still saving for retirement. That way you’re less vulnerable to the whims of a future chancellor desperate to find cash from somewhere.
*Featured on the Financial Times website on 15th August 2025: Is your ISA strategy up to date?.
Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.
What you need to know
This article does not constitute advice. Tax laws are subject to change and taxation will vary depending on individual circumstances.