How to get around the new Pension & Inheritance Tax Rules

Key takeaways

• From 6 April 2027, most unused pension funds and pension death benefits will be included within a person’s estate for Inheritance Tax purposes.
• Along with rising house prices, this new rule means more couples than ever might be pushed into the ‘million pound’ inheritance tax bracket.
• Pensioners may be able to reduce the potential impact through wider retirement and estate planning, including pension withdrawals, gifting and suitable life insurance arrangements.
• Whole of Life insurance may help provide beneficiaries with funds towards an Inheritance Tax liability, but it does not remove the liability itself.
• There is no single pension Inheritance Tax “loophole”. Any planning strategy must comply with tax rules and be suitable for the individual’s circumstances.
• Pension, tax and estate planning decisions should be reviewed with appropriately qualified financial, tax and legal advisers.

Speak to us about your inheritance planning

Concerned about how the pension Inheritance Tax changes could affect your estate? We can help you review your pension, protection and inheritance planning options.

Call our team on 0118 916 5480 or send us a message.

What are the recent changes to Inheritance Tax (IHT) on pensions?

From 6 April 2027, most unused pension funds and pension death benefits will be included within a person’s estate for Inheritance Tax purposes. This could affect people who had planned to preserve pension wealth for children or grandchildren.

Pension funds currently sit outside your estate. So some people have been using pension funds as a way of preserving money to pass money onto the next generation without the burden of Inheritance Tax. And the government are putting a stop to this.

The new Pension and Inheritance Tax rules might affect you if:

• You have children or grandchildren and generous inheritance plans.
• Your house, investments and pension pots will tip you over the £1m IHT bracket.
• You’ve been investing money personally or from your business into your pension to be able to pass on a lump sum to the next generation.
• You’re a farming family and you’re worried about the financial impact of the new Inheritance Tax rules on your children.

How can pensioners reduce the impact of Inheritance Tax?

There is no single strategy that will be suitable for everyone. Depending on their retirement income, pension arrangements and wider estate, pensioners may consider:

• Reviewing how and when pension benefits are withdrawn
• Using pension income to support lifetime gifting
• Making gifts from surplus income where the relevant conditions are met
• Reviewing pension beneficiary nominations
• Considering whether an annuity could provide a reliable retirement income
• Using suitable life insurance to help beneficiaries meet a future Inheritance Tax liability
• Reviewing wills, trusts and wider estate planning arrangements

Each option can have financial, tax and legal consequences, so decisions should be based on personalised advice.

The ‘Whole of Life’ loophole

You’ve worked hard to be able to leave a legacy to your children and grandchildren; to help them buy a house without the crippling mortgage, to help them build their dream business or simply to give them a better life. And now all your careful pension inheritance planning might have been for nothing.

But there is another way – with Whole of Life Insurance.

The big idea…

You use some or all of your pension pot to buy an annuity (a guaranteed income for life). You then use this annuity income to fund a Whole of Life Insurance policy for the original total sum of your pension pot (or however much you’d like to insure). The Whole of Life policy is written in trust for the beneficiaries and, when you die, it pays out the equivalent of your pension pot (or however much you’ve insured) to your beneficiaries. But, and here’s the key difference, because a Whole of Life policy is written in trust, it falls outside your estate. So the payout to your beneficiaries will be exempt from Inheritance Tax and any other tax. In the same way that you thought your pension would be.

What is a Whole of Life Insurance Policy?

A Whole of Life policy does what it says on the tin; it’s a policy that’s set up for an individual’s lifetime. It’s different to a traditional Life Insurance policy which has a set term and will expire at a certain age (normally 89 years old).

Whole of Life policies can be taken out up to the age of 79 but will last until you die. Where traditional Life Insurance policies tend to be used to protect a specific debt or financial risk, an open-ended Whole of Life policy is perfect for passing on inheritance lump sums because, let’s face it, none of us know when we’re going to die.

What about inflation?

To combat the effects of inflation, it’s also possible to link the annuity and the ‘sum assured’ to the RPI. Which means that your annuity income and sum assured are future-proofed and will maintain their current-day value

Who should pay for a Whole of Life policy?

We often hear of children helping to fund a Whole of Life premium for their parents to avoid paying Inheritance Tax in the future. But if possible, it makes more sense to use capital from your own estate to fund a Whole of Life Policy and reduce the IHT burden on your beneficiaries.

When does IHT bite?

Money passed to a spouse or civil partner is exempt from Inheritance Tax. So IHT only comes into play when an estate (including cash, investments, property, and other possessions) reaches a certain size. If your estate is under £325,000, Inheritance Tax won’t apply. And this figure rises to £500,000 if your estate includes a primary residence. This is known as the ‘nil-rate band’. Spouses and civil partners can also pass unused nil-rate bands to each other which means, as a couple, you could pass on as much as £1 million without Inheritance Tax.

Anything over this amount will be taxed at 40%. So, if you’re currently taking advantage of the ‘Pension Pot Loophole’ to reduce Inheritance Tax, the ‘Whole of Life Loophole’ could be the tax-efficient alternative when the new IHT rules come into play in April 2027.

So what now?

If you’re concerned about Inheritance Tax and would like financial advice on how to use a surplus pension pot to fund Whole of Life (and ensure your children get maximum inheritance), pop in and see us or give us a call and we can talk through your options.

Using a broker like Macbeth means you’ll also get the best possible price because we have access to the whole insurance market.

Want a quote for IHT-efficient insurance?

Email Simon  simon.claxton@macbeths.co.uk

FAQs

What strategies can pensioners use to minimise Inheritance Tax?

Pensioners may consider reviewing pension withdrawals, lifetime gifting, gifts from surplus income, beneficiary nominations, trusts and life insurance. The most suitable strategy will depend on retirement income needs, estate value, family circumstances and the tax consequences of each option.

How can I legally reduce Inheritance Tax on my pension assets?

Legal planning may include using pension funds during retirement, making qualifying gifts and arranging suitable protection to help beneficiaries meet a tax liability. Pension withdrawals and gifts can create other tax or affordability implications, so professional advice should be obtained before taking action.

Will pensions be subject to Inheritance Tax from 2027?

From 6 April 2027, most unused pension funds and pension death benefits will be included within the estate for Inheritance Tax purposes. Some benefits remain excluded, including death-in-service benefits paid from registered pension schemes.

Are there any loopholes to avoid Inheritance Tax on pensions?

There is no general loophole that removes Inheritance Tax from pension assets. Legitimate planning strategies may reduce the potential liability or provide funds to meet it, but these must comply with tax rules and be suitable for the person’s circumstances.

Can Whole of Life insurance reduce pension Inheritance Tax?

Whole of Life insurance does not directly reduce the taxable value of a pension. When appropriately arranged, however, it may provide beneficiaries or trustees with a payout that can help meet an Inheritance Tax liability.