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.
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:
| Years paying premiums | Age reached | Total premiums paid |
|---|---|---|
| 20 | 80 | £318,768 |
| 30 | 90 | £478,152 |
| 40 | 100 | £637,536 |
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.
12 comments on this article
Learn from your peers’ experience
A different perspective could help you spot an issue, avoid a mistake or find a better way forward. Read the comments and add your own views if you wish.
Previous Article
Landlords could face a legal duty to allow EV chargers
Member Since October 2013 - Comments: 1771 - Articles: 3
10:26 AM, 27th October 2026, About 2 days ago
I had planned for my remaining pension pot to be split equally between my 2 children, which worked… until Labour. However, as my son has lived in Dubai for 22 years, and is a non-UK taxpayer, I am planning to change my Will to leave him 100% of my pension, and my daughter will get more of my home. I have just bought an Annuity with part of my pension, which I hope to be able to receive for many years, but will also pay out to my beneficiaries for a guaranteed period should I pop off early.
None of this is easy and may not make sense to many, nothing is guaranteed, and I have worked this through with my financial advisors. But I would rather take those risks than leave my hard earned money to that bunch of financially illiterate imbeciles.
Member Since November 2017 - Comments: 270
11:20 AM, 27th October 2026, About 2 days ago
Could you develop this concept along this path?
Rather than use the annuity to pay the whole of life cover, live off the annuity and do the cover via your company and rental income, thereby making it tax deductible, I think?
Member Since January 2024 - Comments: 445
11:40 AM, 27th October 2026, About 2 days ago
An interesting idea, but I think the comparison needs to take account of the income tax payable on the annuity over the individual’s lifetime, particularly if the insurance is written on a second-death basis.
Using the example given, at a 40% income tax rate, the annual tax cost would be approximately £10,626. Over 30 years that amounts to £319,000, and over 40 years £425,000 – exceeding the potential £400,000 IHT saving.
Furthermore, purchasing the annuity means giving up the pension fund and any future investment growth, which could be substantial over 20–40 years.
The arrangement might work well where death occurs relatively early, but for a healthy individual or couple with a long life expectancy, where it may not produce a better result than retaining the pension.
Member Since June 2013 - Comments: 3389 - Articles: 83
12:46 PM, 27th October 2026, About 2 days ago
Some good variables there Mark for people to think about.
And some good replies so far giving alternatives, this way that way. People’s gonna’ be thinking this in their sleep tonight. Unless of course they don’t make it to morning, then wish they’d have bought that annuity last month.
Member Since August 2023 - Comments: 46
2:48 PM, 27th October 2026, About 2 days ago
Life assurance is worth exploring, but go in with your eyes open. A whole-of-life policy only pays out if you keep up the premiums until death. On average you’ll pay in roughly what it pays out, plus the insurer’s margin, and the older you are when you start, the dearer it gets. What you’re really buying is certainty that the tax bill will be covered. For couples, a joint life, second death policy written in trust is usually the cheapest option and pays out when the IHT actually falls due.
Pensions are a growing problem. From April 2027, unused pension funds count towards your estate for IHT at 40%. If you die aged 75 or over, your beneficiaries will also pay income tax when they draw the money out. The combined hit is typically 52% to 67%, depending on the beneficiary’s tax rate, and can be higher in some cases.
My approach is to draw more from my pension as income and give regular sums to my children. Gifts that are regular, come from income and leave my standard of living unchanged are exempt from IHT straight away under the “normal expenditure out of income” rule. I keep records so my executors can prove it. Larger one-off gifts only become fully IHT-free if I survive seven years. I also pay income tax on what I draw now, so it isn’t free, but it can work out cheaper than leaving the pension to be taxed twice.
Everyone’s situation is different, so it’s worth taking independent financial advice before acting.
Member Since October 2013 - Comments: 1771 - Articles: 3
3:18 PM, 27th October 2026, About 2 days ago
Reply to the comment left by Mick Roberts at 27/10/2026 – 12:46
The pension theft starts next April, and at 72, I am not looking at a 20 year plan. I am looking at a 13 year plan where I hope to still be fit and active at 85. That could change tomorrow! My partner went down the life assurance path at age 65, but she has several health issues. Her life assurance term is just 10 years, which I hope she exceeds by a long time. Meantime, she’s transferred a house to her son and reclaimed the CGT through an EIS investment.
Member Since October 2013 - Comments: 1771 - Articles: 3
3:19 PM, 27th October 2026, About 2 days ago
Reply to the comment left by Mick Roberts at 27/10/2026 – 12:46
If I don’t make it to tomorrow, I won’t be wishing anything! 🤣
Member Since June 2013 - Comments: 3389 - Articles: 83
5:05 PM, 27th October 2026, About 2 days ago
Reply to the comment left by NewYorkie at 15:18
I know,
Disgusting isn’t it.
You made these plans & changes & sacrifices cause you knew the rules.
Then you thought, I’ll keep saving into this pension to leave it to kids or Grandkids or whoever.
Then Labour come in & say you see that Mick & NewYorkie, we know you’ve saved all your life & u did save cause u knew the rules who u could leave it to. Well, we now changing that now you’ve got your big pots built up. We gonna’ take 40% of it. We can do nothing in this country with security, not knowing if they gonna’ change the rules in 6 months time.
Good putting it out there on the CGT & EIS.
Member Since June 2013 - Comments: 3389 - Articles: 83
5:08 PM, 27th October 2026, About 2 days ago
Reply to the comment left by Hugh Baily at 27/10/2026 – 14:48
You sound really switched on. You say what I know, lots don’t. Yet you make it look simpler than Google.
Member Since January 2024 - Comments: 445
5:52 PM, 27th October 2026, About 2 days ago
Reply to the comment left by Mick Roberts at 17:05
Nothing like a bit of retrospective legislation.
And the Left are having a melt down because Mahmood is saying she wants to delay Right to Remain to 10 years. The reason they are up in arms? Because they think it is retrospective legislation.
It didn’t matter when it was our pensions, or restricting interest relief on mortgages we took out years ago, did it?