Pension inheritance tax: another option my IFA brought to my attention

Some conversations make you look again at something you thought you understood. A recent discussion with my IFA, did exactly that for me.

We were discussing landlords whose rental income already covers their living costs and who have substantial pension funds they had hoped to leave to their families. With most unused pension funds and pension death benefits coming within the scope of inheritance tax from 6 April 2027, that is a conversation many families will need to revisit.

Richard (my IFA) introduced me to a particular type of flexible pension annuity. What caught my attention was the combination of retirement income and a mechanism through which any remaining investment value could pass to the family, potentially benefiting from inheritance tax relief.

What happens to the money that remains?

An annuity is usually associated with exchanging pension savings for retirement income. With this arrangement, the income is supported by investments, and the client can separately purchase a preference share linked to the assets supporting their annuity.

When the client dies, the annuity ends. The preference share provides a route for any remaining value to pass to their estate. That share may qualify for Business Relief, potentially reducing or eliminating the inheritance tax attributable to its value.

That possibility is subject to conditions. These include normally owning the share for at least two years, its continuing qualification for relief and the available relief allowance. The share forms part of the estate; the potential benefit comes from the relief claimed against it.

For someone reconsidering what their pension could do for their family, I thought this was worth sharing. It offers a different conversation about retirement income and what might remain on death.

Could the income also help provide for the family?

There is a further possibility for landlords whose property income already meets their everyday needs. Could the annuity income, after income tax, fund Whole of Life insurance premiums?

I have previously written about Whole of Life insurance and inheritance tax. With suitable trust arrangements, the insurance proceeds can normally be paid outside the insured person’s estate, providing money for the family when it is needed.

The potential combination is what interests me: taking pension income to fund insurance cover, while any remaining value linked to the preference share may separately qualify for Business Relief. Whether the two work well together depends on the individual’s circumstances, the insurance terms and the advice they receive.

There are practical considerations. Investment values and annuity income can fall, charges apply, and the annuity cannot normally be surrendered after its cancellation period. Insurance availability and cost depend on age and health, and premiums must remain affordable to maintain cover. Tax treatment depends on individual circumstances and can change.

This is an income-producing retirement arrangement with potential estate-planning benefits. It deserves an individual assessment, particularly where pension savings are intended to support both retirement and the next generation.

Would you like Richard to explore this with you?

I am sharing something Richard brought to my attention because it may be relevant to some Property118 members. Property118 is not acting as your financial adviser, and this article is not a recommendation to purchase an annuity, preference share or insurance policy.

If you have a substantial pension fund and would like to understand whether this approach could fit your circumstances, complete the form below. Please include the estimated total value of your pension funds so Richard and his team can prepare for the discussion.

By requesting an introduction, you are asking us to pass your enquiry and the information you provide to Richard Beardsworth and his team at Insight Financial Associates so they can contact you.