Sustaining pension wealth across generations in an IHT world

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Strategy 1: Preserve the pension

James could leave the pension untouched, allowing the full £400,000 to remain invested within the pension wrapper and pass through beneficiary and successor drawdown arrangements following his death. This maximises long-term tax-efficient growth and preserves flexibility over how and when future beneficiaries access the funds. This approach also enables James access to the fund to draw benefits as and when needed.

The trade-off is that the pension remains exposed to future IHT as it passes through successive generations. While Sarah can benefit from the spousal exemption, later beneficiaries may not enjoy the same protection – such as where funds pass to Andrew. In contrast, where a member, beneficiary or successor dies before age 75, inherited drawdown benefits can generally be accessed free of income tax, subject to the relevant death-benefit conditions. In some circumstances the flexibility and income tax position may outweigh future IHT considerations.

This approach may appeal to clients who value flexibility, expect future beneficiaries to make effective succession planning decisions, and believe the benefits of retaining the full fund within the pension outweigh potential future tax costs.

Strategy 2: Move pension wealth into trust

Where pension wealth is withdrawn, advisers must consider how the proceeds will be reinvested. Investment bonds are often used alongside trust planning because they can combine tax efficiency, administrative simplicity and flexibility in how wealth is distributed between beneficiaries over time.

In this approach, James fully accesses his pension using UFPLS (though the same outcome could be achieved taking tax free cash and drawdown) and reinvests the net proceeds into an offshore bond held within a trust. The offshore bond provides gross roll-up, with any UK tax on gains deferred until a chargeable event occurs.  Individual policy segments can also be assigned to beneficiaries, providing flexible intergenerational and tax planning options. Although many of the planning principles could also be achieved using an onshore bond.  The choice will ultimately depend on clients’ tax position, investment requirements and long-term planning objectives.

While this strategy creates an immediate income tax liability for James, it may appeal where reducing future IHT exposure and increasing control over family wealth are the primary objectives. Provided the trust is structured appropriately, future growth remains outside the estates of both James and future beneficiaries. Trustees can control how and when assets are distributed rather than relying on beneficiaries to preserve inherited wealth.

Although trusts have their own tax regime, including potential periodic and exit charges, these costs may be outweighed by avoiding repeated exposure to IHT across successive generations. As a result, this approach may be attractive to clients who prioritise long-term control and estate planning over maximising the amount retained within a pension.

Strategy 3: Combine pension and trust planning

This third option combines the strengths of both approaches. James crystallises his pension and withdraws only the £100,000 pension commencement lump sum, gifting it into trust and investing it in an offshore bond. The remaining £300,000 stays invested within pension drawdown, creating two planning vehicles with distinct roles.

The pension continues to provide tax-efficient growth and withdrawal options and James can still nominate his beneficiaries for the remainder of his pension. Simultaneously, the trust begins moving wealth outside future estates and introduces greater control over how funds are distributed. Over time, trustees can adapt distributions to reflect changing family circumstances and objectives.

For many clients, this approach offers a practical middle ground. It avoids the significant income tax cost of fully withdrawing the pension while starting the process of reducing future IHT exposure. The trade-off is that crystallising benefits today fixes the pension commencement lump sum on today’s values - preventing increases with subsequent fund growth.

This hybrid approach may be particularly attractive where clients are uncertain about future legislation, expect family circumstances to evolve over time, or simply do not wish to commit entirely to either strategy. It can provide a blend of growth potential, tax efficiency, flexibility and control that aligns well with real-world client objectives.

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