Pension inheritance tax: an idea I wanted to share with you

If you have been leaving your pension untouched for your children, an email I received recently from my Financial Adviser may give you something new to consider.

Many property-owning families have built substantial pensions but rely on rental income to support their lifestyle. The pension has therefore become money they hope to leave to the next generation.

From 6 April 2027, most unused pension funds and pension death benefits will enter the inheritance tax calculation.

For families already above their available allowances, that changes the picture considerably.

My Financial Adviser (Richard Beardsworth) recently sent me details of a specialist annuity arrangement with potential inheritance-planning benefits, which prompted a further thought which I wanted to share with our members.

Could pension income you do not need for yourself pay for an inheritance for your family that normally falls outside your estate?

How the idea fits together

The concept is straightforward. Pension money purchases an annuity, which pays an income. After allowing for income tax, some or all of that income could pay the premiums on Whole of Life insurance written into a suitable trust.

When the insured person dies, a valid claim pays the agreed insurance benefit to the trustees for the intended beneficiaries. With the policy and trust correctly arranged, those proceeds normally fall outside the insured person’s estate for inheritance tax.

For a property-owning family, that could provide money to meet the inheritance tax bill and help preserve properties they would otherwise have to sell. The tax on the property estate is still calculated in the usual way; the policy provides funds to help pay it.

Where the potential 40% advantage comes from

Imagine a pension worth £1 million at death, with the whole amount exposed to the standard 40% inheritance tax rate after allowances and exemptions. That would leave £600,000 before any income tax payable by the pension beneficiaries.

Compare that with a £1 million insurance payout into an appropriately arranged trust, outside the insured person’s estate. The trustees could receive the full £1 million without that £400,000 estate IHT deduction.

That is the potential tax advantage worth exploring. It is a comparison of two amounts at death, rather than a calculation of the overall return from either approach.

Even if premiums paid over many years eventually equalled the original pension fund, the different IHT treatment could still matter. Whether the arrangement actually leaves the family better off depends on income tax, costs, inflation and what the pension would otherwise have grown to or retained.

What might the premiums look like?

In my earlier article about inheritance tax and Whole of Life insurance, the indicative premium for £1 million of cover for a healthy man aged 60 was £1,328.20 a month.

That is £15,938.40 a year. These were illustrative figures published in May 2026, not a current quotation. Assuming the premium and £1 million cover remained fixed, the totals would be:

The annuity would need to fund those premiums after income tax. For example, if all the relevant annuity income were taxed at 40%, funding £15,938.40 of annual premiums would require £26,564 of gross annual income. Richard would need to establish whether the available pension could support that income sustainably.

The part nobody can predict

We do not know when our families will need the money.

Once fully underwritten cover is in force, a valid claim following an accident shortly after the first premium could trigger the full agreed payout, subject to the policy terms. The family would not have to wait for decades of premiums to accumulate.

Equally, someone could live for another 30 or 40 years. Whole of Life cover is designed to remain in place throughout life, provided the policy conditions are met and the required premiums continue to be paid.

That combination is what interests me: the potential inheritance tax treatment, together with protection against the uncertainty of when the money will be needed.

For couples, cover payable on the second death may fit the family’s needs more closely. In that case, the plan must also provide a way to keep paying premiums after the first person dies.

Could it fit your family’s plans?

If your pension was always intended for the family, this could be a useful conversation to have. Richard, or a member of his team) would need to assess the annuity’s income, investment risks, charges and access restrictions, alongside insurance affordability and the tax treatment of the premiums and trust. Combining the arrangements needs its own assessment.

If you would like to explore whether this could work for your family, please complete the form below, including your estimated total pension fund value.

With your consent, I will pass your enquiry to Richard and his FCA regulated team, who can discuss your circumstances and assess whether either or both approaches could be appropriate.

Property118 is not a firm of independent financial advisers and is not recommending either arrangement. Examples are illustrative, not quotations or promises of a tax saving. Insurance is subject to underwriting, policy terms and maintaining premiums. Tax treatment depends on individual circumstances and can change; premiums and trusts can have separate tax consequences. Individual financial and tax advice is essential.