Pensions and Inheritance Tax Hub

There’s no universal solution, every client will have unique circumstances. Balancing IHT exposure, with income tax exposure is key.  Popular estate planning strategies include lifetime gifting, using life assurance and using exemptions; Advisers should tailor strategies with these factors in mind: 

• Think about the entire estate: Pensions will form part of wider wealth transfer planning, consider all estate assets, not just pensions when planning for the additional IHT liability.  
• Client goals: for example, if a client wants to leave a lump sum legacy, annuitisation may not be the best course of action. 
• Client and beneficiary tax position: pension income and certain pension death benefits are subject to income tax. Increased income tax exposure may offset IHT savings. 
• When to act:  Age 75 represents a cliff edge where most pension death benefits transition from being income tax free to fully exposed to income tax. Do clients have time and ability to replan their wealth transfer considering April 2027 changes without jeopardising IHT plans if death happens before April 2027?  
• Beneficiaries could also have IHT liabilities: Consider directing benefits to grandchildren rather than concentrating assets with children, to help reduce cumulative IHT exposure across generations. 
• Fund choices: If your client’s pension is no longer a vehicle for wealth transfer, is it being repurposed for income or lower growth? Are the fund choices still appropriate?

Yes, pension death benefits will be included in the estate valuation. This could push the total estate value above the £2 million threshold where the RNRB is tapered at £1 for every £2 over the threshold. The RNRB is lost completely at £2.35 million (£2.7 million for estates with an inherited RNRB). 

Implications for clients: 

• Estates previously under the threshold may from April 2027 exceed it due to pension inclusion. 
• Any gift made by the client immediately reduces the estate for the purposes of the RNRB taper. Planning, such as gifting, or annuitisation if the pension is to be used as a source of income can be immediately effective to regain this valuable IHT band.

Yes, annuities can certainly be used to reduce the value of the estate and guarantee a regular income for life. This can be useful for some clients and using annuities for everyday income can help you to realign other assets for estate planning.  

Advisers should ensure purchasing an annuity aligns with a wider income tax and wealth transfer strategy. There are a number of advantages and disadvantages to consider.  

Advantages of annuities: 

• The purchase price is removed from the estate immediately. 
• Provides predictable income and supports structured gifting (for example, gifts from normal expenditure). 
• Annuity options can be tailored for client needs. 
• Joint life annuities will be exempt from assessment to IHT. 

Disadvantages: 

• Purchasing an annuity could result in fewer benefits than expected if your client dies early, unless annuity protection is purchased. 
• Limited flexibility if client circumstances change. 
• Higher and additional rate taxpayers may face income tax rates that offset IHT savings. 
• Annuity protection and guaranteed periods remain within IHT scope. 

Adviser tip: Consider using annuity income for gifts or to fund life insurance to offset potential IHT liabilities. Use the normal expenditure from income exemption if available for maximum IHT efficiency. 

Yes, both DB and defined contribution (DC) schemes are impacted, though as these schemes usually offer different death benefits there are some practical differences. For DB schemes the following will be included in IHT assessments: 

• DB lump sum death benefits. 
• Pension protection lump sums. 
• Certain death in service payments for those no longer employed. 

Excluded from IHT: 

• Death-in-service benefits if the member was actively employed. 
• Dependants’ scheme pensions (for example. spouse pensions from DB schemes). 
• Trivial commutation lump sums paid from a dependant’s scheme pension 

Adviser tip: In the majority of cases death benefits from Defined Benefit schemes won’t require the calculation of the cash equivalent transfer value (CETV). The death benefits should be available in time to calculate and settle IHT liabilities within 6 months of death.  

Understanding client needs and total assets will play a big role determining when to access tax-free cash. Accessing the lump sum earlier allows more time for the lump sum to be gifted and then be fully outside of your estate after 7 years. You also need to consider the income tax implications on death before and after age 75.  

Before age 75: 

• Most death benefits remain income tax-free (except for scheme pensions). 
• Leaving funds in the pension allows continued tax-free growth. 

After age 75: 

• Death benefits are subject to income tax and IHT. 
• Taking tax-free cash may help reduce taxable estate and reduce assets subject to income tax. 

Adviser tip: Consider how gifted funds could be used tax-efficiently.  For example, lump sums could be gifted to adult children to maximise their pension provision.