Retirement Options Guide 2026/27

Three changes that matter for 2026/27

Three reforms have changed the pension landscape since the previous edition. Together they reshape how tax-free cash works, how big estates are treated, and what happens on death.

Lifetime Allowance abolished — 6 April 2024

The Lifetime Allowance, which previously capped the total amount of pension benefits you could draw without an additional tax charge, was abolished on 6 April 2024. There is now no overall lifetime cap on pension savings, and the Lifetime Allowance Charge no longer exists.

Two new lump-sum allowances

• Lump Sum Allowance (LSA) — £268,275. This caps the total amount of tax-free cash you can take in your lifetime. Each tax-free lump sum reduces the LSA you have left.
• Lump Sum and Death Benefit Allowance (LSDBA) — £1,073,100. Caps the combined total of tax-free lump sums you take during your life and tax-free lump sums paid to your beneficiaries on your death before age 75.

Pensions and Inheritance Tax — planned change from 6 April 2027

The Autumn Budget 2024 announced the government's intention to bring most unused pension funds and death benefits into the scope of Inheritance Tax (IHT) from 6 April 2027. The detail is subject to consultation and final legislation, but the change is expected to remove a long-standing IHT advantage of leaving pension funds untouched — and may change the planning case for using pension assets earlier in retirement, for non-pension assets, or for gifting strategies.

The State Pension

The State Pension is a regular payment from the government, paid every four weeks on the basis of your National Insurance (NI) record.

How much

The full new State Pension for 2026/27 is £241.30 per week, equivalent to approximately £12,548 per year. People who reached State Pension age before 6 April 2016 are within the previous Basic State Pension and Additional State Pension system instead.

Qualifying years

Under the new State Pension you generally need at least 10 qualifying NI years to receive any State Pension at all, and 35 qualifying years to receive the full rate. Years between those levels produce a proportionate amount.

Voluntary NI

If your NI record has gaps, you may be able to make voluntary Class 3 NI contributions to fill them, normally for the previous six tax years. The Class 3 rate for 2026/27 is £18.40 per week, so filling a complete missing year costs around £957 and adds around £358 of extra State Pension per year for life — often very cost-effective for those with gaps.

Deferral and State Pension age

You don't have to take your State Pension as soon as you reach State Pension age. Deferring increases your eventual pension by 1% for every nine weeks (~5.8% per year) for those reaching State Pension age on or after 6 April 2016 — paid as additional pension only, no lump-sum option.

Current State Pension age is 66, rising to 67 in stages between 6 April 2026 and 5 March 2028, and legislated to rise to 68 between 2044 and 2046.

Your options at retirement

From the minimum pension age (currently 55, rising to 57 from 6 April 2028), you can normally take a defined-contribution pension in any of these ways. Most people use a combination.

Tax-free cash and the Lump Sum Allowance

The most valuable single feature of a UK defined-contribution pension is the right to take 25% of the fund as a tax-free lump sum, formally the Pension Commencement Lump Sum (PCLS). Under post-April-2024 rules this is now controlled by the Lump Sum Allowance.

Lump Sum Allowance — £268,275

The standard LSA is £268,275 (which is 25% of the old standard Lifetime Allowance of £1,073,100). Each tax-free lump sum reduces the LSA you have left. Once you've used your full LSA, any further lump sum from a pension is taxed as income at your marginal rate.

If you have a form of LTA protection (Primary, Enhanced, Fixed Protection 2012/14/16, Individual Protection 2014/16) that gives a higher entitlement to tax-free cash, your personal LSA is calculated by reference to that protection. We check the position before any benefits are taken.

Lump Sum and Death Benefit Allowance — £1,073,100

The LSDBA caps the combined lifetime total of (a) tax-free lump sums you take during your life and (b) tax-free lump sums paid out on death before age 75. The standard LSDBA is £1,073,100.

Annuities

An annuity is a contract with an insurance company under which you pay a lump sum from your pension fund and receive a guaranteed income in return. There are several types.

Lifetime annuity

Pays a guaranteed income for the rest of your life. Income is taxed as earned income. The amount depends on your age and health, the size of the pension you used to buy it, prevailing long-dated interest rates, and the options you choose. Once a lifetime annuity is in payment you can't normally cash it in or change the options.

Choices at outset include: single life or joint life (joint life pays a survivor income, usually 50% or 66.7% of yours); level, escalating or decreasing income (level pays the same each year; escalating rises annually at a fixed rate or with RPI/CPI); guarantee period (5 or 10 years — if you die within, payments continue to a beneficiary for the balance); and annuity protection / value protection (lump-sum return on death of the difference between purchase price and gross income paid).

Enhanced and impaired-life annuities

If you have a medical condition or lifestyle factor that may shorten life expectancy (heart disease, diabetes, certain cancers, smoking, significant overweight, certain occupations), you may qualify for a higher rate. Always disclose health conditions when shopping the market — failing to do so can mean accepting a standard rate when a much higher rate was available.

With-profits, unit-linked, and fixed-term

A with-profits annuity links your income to the smoothed investment returns of an insurer's with-profits fund — income can fall as well as rise. Unit-linked annuities link income directly to an underlying fund value. Both products are increasingly rare in the UK market today.

A fixed-term annuity pays a guaranteed income for a set period (commonly 5 or 10 years) and then either matures with a guaranteed maturity value or rolls into a further annuity, drawdown, or another arrangement. Sits between conventional lifetime annuities and drawdown.

Open Market Option

You're not obliged to buy from your existing pension provider. Annuity rates differ materially between providers; for most people, shopping the market via the Open Market Option is the right call.

Drawdown

Drawdown lets you keep your pension fund invested and take income from it on a flexible basis. Two regimes exist: flexi-access drawdown (the standard regime since April 2015) and capped drawdown (legacy plans set up before that date — no new capped drawdown plans can start today).

Flexi-access drawdown

No limit on how much you can take from the fund each year. Up to 25% of the crystallised value can be taken as tax-free PCLS (subject to the LSA); the remaining 75% normally moves into the drawdown account. Income beyond the tax-free element is added to your other taxable income for the year and taxed at your marginal rate(s).

The Money Purchase Annual Allowance (MPAA) — important

When you flexibly access a defined-contribution pension — by drawing income from flexi-access drawdown, by taking a UFPLS, or by exceeding the GAD limit on capped drawdown — your future Annual Allowance for defined-contribution contributions is reduced from £60,000 to £10,000. The MPAA is irreversible. If you intend to continue paying material amounts into a pension after taking benefits, this is one of the most important consequences to understand at the outset.

Taking only tax-free cash, or buying a lifetime annuity, does not trigger the MPAA.

Investment Pathways

Where a client moves into drawdown without advice, the FCA requires drawdown providers to offer four "Investment Pathways" linked to broad retirement objectives. Where Aries advises on a drawdown arrangement, we document the Pathway options and explain why the recommended investment strategy is suitable.

UFPLS — Uncrystallised Funds Pension Lump Sum

A UFPLS is a way of taking pension benefits as a series of lump sums without first moving the fund into drawdown. Each lump sum is treated as 25% tax-free and 75% taxable as earned income.

Example: a £20,000 UFPLS would be £5,000 tax-free + £15,000 taxable. Tax is deducted under PAYE by the provider, often using an emergency tax code that may produce an over- or under-payment that needs reconciling with HMRC.

Conditions

• Must be aged at least 55 (rising to 57 from 6 April 2028) or meet ill-health conditions.
• Must be paid from uncrystallised pension rights in a money-purchase pension.
• The 25% tax-free portion of each UFPLS counts against the £268,275 Lump Sum Allowance.
• Taking a UFPLS triggers the MPAA — future money-purchase contributions restricted to £10,000 a year.

Phased retirement

Phased retirement means crystallising your pension in slices over time rather than all at once. You can phase using drawdown, annuities, UFPLS, or a combination. The benefit is that part of your fund stays uncrystallised — and therefore continues to grow within the tax wrapper — while the rest funds your income.

Phasing tends to suit people with funds large enough that they don't need to be entirely converted into income at the start of retirement; people with other income sources to bridge the early years; and people who would value retaining flexibility about how the fund is eventually used. It's more administratively involved than a single one-off decision and typically carries higher charges over the lifetime of the arrangement.

Death benefits and the 2027 IHT change

Pension death benefits are one of the most valuable features of a UK pension. The rules depend on whether you die before or after age 75, the type of pension, and what the recipient does with the money.

Before age 75 — current rules

Benefits paid out from a defined-contribution pension are normally tax-free in the recipient's hands, whether taken as a lump sum, used to buy an annuity, or moved into beneficiary drawdown. Lump sums are tested against the LSDBA (£1,073,100); excess is taxed at the recipient's marginal income tax rate.

On or after age 75 — current rules

Benefits are taxed at the recipient's marginal income tax rate, whether taken as a lump sum, an annuity, or beneficiary drawdown income. There's no LSDBA test in this scenario — full benefits flow through, taxable on the recipient.

The planned 2027 IHT change

At the date the guide was issued, most defined-contribution pensions sit outside the deceased's estate for IHT purposes (provided the scheme administrator has discretion over who receives the death benefit — the standard position with a properly completed nomination).

The Autumn Budget 2024 announced the intention to bring most unused pension funds and pension death benefits within the scope of IHT from 6 April 2027. From that date, pension assets that pass to non-spouse / non-civil-partner beneficiaries are expected to be tested for IHT alongside the rest of your estate. This is one of the most material reforms to retirement planning in many years.

Nomination — keep it up to date

Make sure you have an up-to-date Expression of Wish (also called a nomination) on every pension you hold. The nomination is not legally binding (because it's the scheme's discretion that keeps the pension out of your estate for IHT today), but administrators almost always follow it. Review nominations after any significant life change — marriage, divorce, birth or death of a beneficiary, or a change in your wishes.

Allowances and limits at a glance — 2026/27

The main figures used throughout this guide for the 2026/27 UK tax year.

Risks and things to think about

Every retirement option carries trade-offs. The risks below apply across the choices described above. We explore the ones most relevant to you in your suitability report.

• Income sustainability. Drawing too much, too early can leave you running out of money in later life. Sequence-of-returns risk — falls in the early years of retirement combined with continued withdrawals — is particularly damaging.
• Inflation. A level annuity or fixed-rate withdrawal that looks comfortable today may purchase materially less in twenty years' time.
• Investment risk. Where the pension stays invested (drawdown, UFPLS, phased), capital values can fall as well as rise. Past performance is not a guide to the future.
• Tax. A large lump sum can push you into a higher income-tax band for the year. The MPAA, once triggered, restricts what you can pay back into a money-purchase pension.
• Loss of guarantees. Some older personal pensions and retirement annuity contracts carry a Guaranteed Annuity Rate (GAR) — often substantially better than the open-market rate. Transferring or restructuring such a plan can mean losing the GAR. We always check for these before any change.
• Means-tested benefits. Pension income, withdrawals and (in some cases) capital remaining in a drawdown wrapper can affect entitlement to means-tested benefits and to local-authority funding for long-term care.
• Charges. Drawdown and phased arrangements have higher ongoing costs than a one-off annuity purchase. Cost should be set against the value the ongoing arrangement provides.
• Pension and investment scams. Retirement savings are a frequent target. Be sceptical of unsolicited approaches and any pressure to act quickly. We will never ask you to transfer money to anyone outside Aries or your chosen regulated provider.
• Vulnerability. Retirement decisions are often made at a time when health, capacity or resilience may be reduced. Tell us if any factor applies and we'll adapt our approach.
• Long-term care. How you take your pension can affect what you have available — and what is means-tested — if you later need care.
• Irreversible decisions. A lifetime annuity, once purchased, can't be undone. The MPAA, once triggered, can't be reversed. Many retirement decisions are one-way doors; others are reversible. Be clear which is which before you act.

Next steps

If you'd like to take any of the options described in this guide forward, the next steps are simply:

1. Read the full PDF guide so you understand both the options and how we work with you.
2. Gather the latest valuations and policy details for every pension you hold (we can request these on your behalf with a Letter of Authority).
3. Obtain a State Pension forecast from gov.uk so we have a clear picture of your guaranteed income base.
4. Make a list of any health conditions, family circumstances, planned major expenses, and other income sources that we should take into account.
5. Book a discovery meeting with us. We'll then prepare a written suitability report setting out our recommendation and the reasons for it, with worked numbers for your specific situation.