AJ Bell Money & Markets
Deep Dive #8: Making Your Pension Last and Navigating Inheritance Tax Changes
Why It Matters
As defined‑contribution pensions become the norm, retirees must navigate complex choices that affect both their lifelong income and the tax burden on their heirs. Understanding drawdown, annuity options, and upcoming inheritance‑tax changes helps listeners protect their savings and ensure a smoother financial transition for future generations.
Key Takeaways
- •Pension drawdown now dominates over annuities since 2015.
- •Early withdrawals can trigger higher tax brackets and emergency tax.
- •Longevity risk: most over‑50s underestimate life expectancy.
- •Sequence‑of‑returns risk can deplete funds if markets fall early.
- •Inheritance tax reforms start April 2027 affect wealth transfer.
Pulse Analysis
The retirement landscape in 2026 has moved far beyond the old defined‑benefit model. Most workers now rely on defined‑contribution pots that they must convert into income themselves. Since the 2015 reforms, drawdown has eclipsed traditional annuities, giving savers the ability to withdraw flexibly from age 55 (rising to 57 in 2028) and to keep the remainder invested for growth. This shift places the responsibility for a potentially three‑decade‑long income stream squarely on the individual, while still allowing a hybrid approach that mixes a modest annuity with drawdown to meet specific cash‑flow needs.
Flexibility brings several hidden dangers. Pulling large sums early can push retirees into higher marginal tax brackets, and a single taxable withdrawal often triggers emergency tax that must be reclaimed from HMRC. The money‑purchase annual allowance also drops once drawdown begins, limiting future tax‑relieved contributions. Longevity risk is acute: a Standard Life survey found 80 % of over‑50s underestimate life expectancy, with average ages now around 85 for men and 88 for women. Sequence‑of‑returns risk—taking too much when markets fall—can erode the pot, especially if the first year sees a 20 % decline after a 5 % inflation‑adjusted withdrawal.
Another looming concern is the inheritance‑tax overhaul slated for April 2027, which will tighten thresholds and could increase the levy on estates passed to heirs. Retirees can mitigate this by balancing tax‑free cash withdrawals—up to $12,800 (≈£10,000) per year—with careful drawdown levels that preserve the £60,000 (≈$76,800) annual pension allowance. Using a modest annuity to cover essential living costs while keeping the bulk of the pot invested can reduce both income‑tax exposure and future inheritance tax liability. Professional guidance is essential to craft a sustainable withdrawal strategy that aligns with personal longevity expectations and evolving tax rules.
Episode Description
In this Deep Dive episode, Tom Selby and Tom Sieber explore what retirement really looks like in 2026 — from phased retirement and flexible working, to drawdown, annuities, tax changes and the risks that could derail your plans. They also hear from a financial adviser on managing money in retirement, and from AJ Bell’s very own Rachel Vahey on inheritance tax and what the latest changes could mean for families.
02:24 Tom Selby and Tom Sieber discuss how retirement is changing, why it no longer has to mean stopping work completely, and what earning part-time or freelance income could mean for your pension planning.
06:34 They break down the main ways to access your pension, including drawdown and annuities, and ask whether the best approach for many retirees might be a mix of both.
10:33 The pair look at the key retirement dates and milestones people need to know, including changes to the Normal Minimum Pension Age and how the State Pension fits into the wider retirement income picture.
18:10 The two Toms examine some of the biggest threats to retirement finances, including longevity risk, sequence risk, inflation and the danger of drawing too much too soon.
24:25 Tom Selby speaks to Rick Gosling, a financial adviser at Five Wealth, about how retirees can manage their money sustainably and avoid common financial pitfalls later in life.
46:42 Tom Sieber catches up with Rachel Vahey, AJ Bell’s head of public policy, to discuss what the inheritance tax changes could mean in practice — and what people can do if they think they may be affected.
01:08:19 Both Toms wrap up with the big takeaways from the episode, including the importance of flexibility, planning ahead and making your retirement savings work for the long term.
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