For the past decade, the standard answer to a recurring retirement-planning question — in which order should a household draw down its assets? — has been clear and almost unanimous. Spend the ISA first. Live on the general investment account if necessary. Take the State Pension. Leave the personal pension untouched for as long as possible, and on death, pass it intact to the next generation outside the inheritance tax net.
The reasoning was simple and durable. Under the pension freedoms introduced in April 2015, defined contribution pots could be inherited by nominated beneficiaries at the marginal income tax rate if the holder died after seventy-five, or entirely tax-free if before. Because trustee discretion held the asset outside the estate, no inheritance tax applied. The pension became, in effect, the most tax-efficient legacy vehicle a middle-class household could construct. Industry shorthand named the strategy. It was 'pensions last'.
The Finance Act 2026, effective for deaths from 6 April 2027, repeals the architectural assumption beneath that strategy. From that date, unused pension funds and most pension death benefits are classified as Notional Pension Property and aggregated with the rest of the estate for the IHT calculation. The standard advice has not yet caught up. It will.
Why the reversal is bigger than it sounds
The arithmetic of 'pensions last' depended on a specific structural quirk. The pension sat outside the estate; the ISA sat inside it. Drawing from the ISA reduced the IHT-exposed pile. Drawing from the pension increased current income tax exposure without producing any IHT benefit. So you drew from the ISA. The pension grew. On death, the heirs took it at their marginal income tax rate — frequently lower than the deceased's — or entirely tax-free in the pre-75 case.
From April 2027, that structural quirk is gone. The pension is in the IHT calculation. The ISA, perversely, may be the more efficient vehicle to spend last for some households, because the ISA's value at death is fixed in cash terms while a growing pension pot is now compounding inside the taxable estate. The orderings invert.
A decade of orthodoxy has expired with three lines of statute. What replaces it is more complicated than what it replaced.
The taper problem nobody is sequencing for
The £325,000 nil-rate band has been frozen since 2009. The £175,000 residence nil-rate band, introduced by the Finance Act 2017, brings a married or civil-partnered couple's combined potential allowance to £1 million when both bands and both transferable halves apply. For estates within that envelope, the inclusion of a modest pension may produce no charge at all.
Above £2 million, the residence nil-rate band tapers. For every £2 of estate value over the £2 million threshold, £1 of RNRB is withdrawn. By £2.7 million for a couple, the RNRB has disappeared entirely. The taper has always been a feature of the system; what changes from 2027 is that pensions are now part of the figure being measured. A household that was £1.6 million in non-pension assets and £500,000 in pensions was previously safely under the taper. The same household, from 2027, sits at £2.1 million and starts losing RNRB.
This is the part of the reform that requires real recalculation, not redrafting of marketing copy. The sequencing question is no longer simply 'which pot do I draw from first?' It is also: 'at what estate value, including pensions, does the residence nil-rate band start tapering — and what does that mean for my net?'
Lifetime gifting becomes the lever again
Three planning behaviours that had largely fallen out of fashion are now being quietly re-examined.
The first is the seven-year potentially exempt transfer. A lifetime gift to an individual sits outside the estate after seven years. For an estate that will breach the nil-rate band primarily because of a pension, accelerated gifting of non-pension assets — within the £3,000 annual allowance, the small gifts exemption, the wedding gift bands, and beyond into PETs — becomes a lever again. The math is not new; the urgency is.
The second is gifts from surplus income. Under section 21 of the Inheritance Tax Act 1984, gifts made out of regular income that do not affect the donor's standard of living are exempt from inheritance tax, without limit. The provision has always been there, has always been under-used, and has always required disciplined record-keeping. For higher-income retirees whose pension drawdowns now feed an IHT-exposed estate, the surplus-income route becomes one of the cleaner ways to keep a planned legacy inside its current scale.
The third is the joint-life annuity. Annuities have been out of fashion since 2015. The Finance Act 2026 has not made them fashionable again, but it has changed the calculus. An annuity converts pension capital into guaranteed income — which is no longer Notional Pension Property — at the cost of inheritability. For a household whose primary objective is to keep the surviving spouse provided for, and which has lost the ability to use the unused pension as a tax-free legacy anyway, the annuity's traditional weakness becomes less of a weakness.
What the trade press has not yet absorbed
Adviser commentary in early 2026 has focused on the headline rate change and the question of whether to draw down faster. Two structural issues are receiving less attention.
The first is the cohabitation gap. The IHT spousal exemption does not apply to long-term cohabiting partners. A pension nominated to an unmarried partner, which previously passed outside the estate entirely, now passes through the estate calculation and is taxed at forty per cent above the nil-rate band. The Office for National Statistics estimates more than three million such couples in the United Kingdom. The number who have repriced their plan against the 2027 rules is, almost certainly, very low.
The second is the executor administration problem. Pension scheme administrators routinely take months — sometimes years — to value pots, identify beneficiaries, and execute discretionary distributions. The personal representative's six-month inheritance tax deadline does not move. The Finance Act 2026 introduces the Withholding Notice mechanism precisely to bridge that gap, which is a polite way of saying it freezes up to half of the pension for up to fifteen months to give the executor cover. Families do not yet understand that the administrative pain of the new regime is at least as large as the tax pain.
What replaces 'pensions last'
There is no single sentence that replaces a decade of orthodoxy. Different households arrive at the 2027 threshold from different starting positions, and the right sequence depends on estate size relative to the combined nil-rate bands and the RNRB taper threshold, on whether the household is married, on whether children or other beneficiaries fall outside the standard exemptions, and on the household's tolerance for inheritability tradeoffs.
What can be said in summary is that the planning question has reverted from a structural one (which pot is in the estate?) to a behavioural one (what do we want to happen between now and the date of death, and what records, gifts, nominations, and instructions make that practical?). The structural answer was useful because it was simple. The behavioural answer is harder, slower, and more personal.
It is also more workable. The structural answer required only that the holder do nothing — let the pension grow, leave the ISA alone. The behavioural answer requires conversation, record-keeping, periodic review, and an executor or trusted person who knows where the information lives. That is not legal advice; it is operational preparedness. And it is precisely the work that the previous decade of 'pensions last' allowed households to defer.
The deferral is now over. The work begins.