Pensions & IHT from 2027

WillK

From 2027 the new rules on pensions will mean (on current numbers) a potentially large IHT bill.

My drawdown fund is substantial so my question is:

If I buy an annuity with a guarantee which potentially pays a lump sum upon my death, is that lump sum still classed as 'pension' or will it be classed as cash?

The purpose of buying the annuity is to bring my estate below £2m and avoid my son having to pay some of the new taxes involved in accessing inherited pensions from 2027.

Thanks

Keep_pedalling

The actual workings of this are not currently known so no one can answer your question, but the best way you can reduce your IHT liability is have fun and spend or give away as much of it as you can.

gm0

As above. Details not published. Classic government. Announce controversial thing - details to follow. Deadline approaches. Details not published. See also the energy effficiency of commercial property by 2030 etc. etc. ad nauseam. Not a party political thing - just a systemic deficiency of the UK state bureaucracy and its incentives on doing difficult complicated things vs issuing happy little press releases aimed at media simpletons and not getting around to the actually doing it part.

On the more positive side. There was a bunch of scaremongering on the pensions inheritance issue. Around worst case. Driven by lack of detail and clarity. So IHT at 40% (for estates eligible) on the residue deducted by scheme, then marginal income tax rate for heirs. Then SLC 9% if applicable. So 89% for the Higher rate. And 69% for the basic rate child with a degree loan.

It is now rumoured - not announced - just rumoured - that the detailed treatment will include a 40% tax credit. So if you pay the 40% IHT (as due) - then no more tax is then due. Unless your marginal rate (as heir) is higher. This to avoid a "double taxation" anomaly.

And perhaps to mitigate the obvious confiscatory manifest unfairness of the whole thing to some degree). This is not baked. But if I had to guess where it will land. That would now be my guess.

Of course a subsequent government may revisit and relabel this as an "income tax loophole" and come back for another slice. Moving towards the worst case scenario.

You cannot plan. They cannot be trusted not to meddle - again and again and again.

Albermarle

is that lump sum still classed as 'pension' or will it be classed as cash?

Presumably if you die, then that lump sum will be paid into your estate, so would be part of IHT calculations?

Dead_keen

I don't like defending the government but details not published?

The Finance Bill is here with the near-final legislaton: https://bills.parliament.uk/bills/4042 It's currently at the Report Stage and so is very unlikely to be amended (technically it is still possible but no pension-related IHT amendments have been laid yet and there were no government statements saying that any will be). So the rules, for both IHT ones and the related income tax ones, are almost certainly fixed.

There will probably be regulations dealing with things like information sharing but they are for the geeky and very unlikely to change the substance.

Details of the new rules were consulted on and then updated. These changes were annouced in July 2025: https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/outcome/inheritance-tax-on-pensions-liability-reporting-and-payment-summary-of-responses

There is plenty of commentary and (and webinars) out there. You can even use your favourite LLM to find out more (but check the sources).

So there are plenty of details published. But it's fair to say that normal people will not read the Finance Bil or stuff from tax and pension specialists. In the Committee of the whole House, the Economic Secretary said:

… comprehensive guidance will be published in advance of April 2027 and HMRC will provide interactive tools to support personal representatives. Publishing guidance when policies go live is established practice, and it ensures that guidance is fully up to date when made available. HMRC will continue to work with industry on shaping that guidance and ensuring that the reforms are fully understood. People will be able to call the inheritance tax helpline for inquiries related to the reforms and, as we would expect, staff will be fully trained on each of the changes such that they can support customers.

In my experience, HMRC is generally very good at that.

In relation to:

If I buy an annuity with a guarantee which potentially pays a lump sum upon my death, is that lump sum still classed as 'pension' or will it be classed as cash?

If you are normal and don't want to look at the Finance Bill, have a look at what someone in the industry says death benefits include: https://adviser.royallondon.com/technical-central/pensions/death-benefits/inheritance-tax-on-pension-death-benefits-from-april-2027/ and you will see that they are included as pension for IHT purposes. The next section shows what death benefits are not in scope.

The purpose of buying the annuity is to bring my estate below £2m …

Don't forget that the tapering of the RNRB is based on the value of the estate on death (not increased by, for example, PETs in the last seven years). So if your estate is £3m and you give £1m away on your death bed, you get the full RNRB.

Albermarle

I don't like defending the government

Why not, makes a change from everyone slagging them off ( not just this Govt, but every Govt)

Otherwise you are right that at least most of the rules are already decided, but I think people would like to see how it is going to work in practice, especially for lay executors. Some of that still seems to be under discussion as you state.

gm0

If it hasn't been communicated to consumers how it works in practice. Then it is isn't finished.

Some IFAs/FAs still hedging in 2026 annual reviews. Family just had one. So not great.

But far from the worse example. It will turn up - more or less. By 2027. Ahead of whatever horrors come next in terms of additive fiddling with the tax code. Never knowingly simplified.

In any event it provides a clear driver for DC pensioners with inheritance considerations - to consider consolidation of said pensions to minimise hassle for their executors. So there is only one pension and one provider to deal with.

If the process ends up better/slicker later - that might not be necessary. But there is little downside in doing it anyway bar some operational risk impact stuff at the margins - low probability stuff. (Pension Forum discussions on provider risk/platforms and hedging thereof - ibid).

Albermarle

In any event it provides a clear driver for DC pensioners with inheritance considerations - to consider consolidation of said pensions to minimise hassle for their executors. So there is only one pension and one provider to deal with

Even without this new legislation or IHT considerations, it is probably a good idea to reduce your number of pensions, savings accounts, S&S ISA's etc. anyway as you get older. Easier to deal with as you get older, and easier for your executor and surviving family members.

Also probably sensible to pick an established pension provider, who you know do not have complicated legacy structures, like Reassure, Phoenix or Aviva. Or ones well known for poor responsiveness like the Pru, or WTW. Or a new one that maybe be free today and gone tomorrow.

Dead_keen

Some IFAs/FAs still hedging in 2026 annual reviews. Family just had one. So not great.

I can't help feeling that says more about the IFAs / FAs. The big picture has remained unchanged for more than 15 months. The detail has been known for nearly seven months.

But then I don't know what "hedging" means. Are they saying you might want to do A or B but I don't what's best? Are they saying not to do anything because it might not happen? Are they saying by the time you die the rules might have changed again so you may or may not want to do something?

If an IFA can't about this sensibly then the big question is why not? Have they not bothered to read up on it? Have they not had any training on it? Have they been told not to mention it? Has their customer not asked about it? Does the IFA know that the customer doesn't like uncertainty?

In any event it provides a clear driver for DC pensioners with inheritance considerations - to consider consolidation of said pensions to minimise hassle for their executors. So there is only one pension and one provider to deal with.

I must admit that of all the things that I thought about when I read the Budget 2024 changes, this was not one of my actions.

gm0

Consolidation of affairs is hardly new news. Multiple employment leads to multiple pots. Consolidation at retirement - can occur - but not always.

Some people don't do anything financial with any care. And leave a huge mess. I have a friend who spent years unravelling family trusts, overseas land and financial assets, and an estate across many siblings/cousins - previously run by happy go lucky fellow. Who chose - not unreasonably - in some ways - to try new things and also concentrate on things other than admin during their precious hours on earth.

I happen to think it's a bit selfish to leave a massive admin crater for your kids to deal with. But other opinions are available. As example above.

In this instance - the "hedging" referred to is probably just personal risk hedging by the adviser. If the legislation hasn't finally landed. Why make a statement "definitively" when you can instead say - it's probably going to be X - subject to the legislation finally landing etc. No comeback if it then does morph. Not particularly helpful

As to real hedging. We had a thread on strategies for 2027 hedging a while ago. And insurance loophole aside (suits some). Getting it spent and/or away - gifting and charity - appears to be the first and main recourse.

I am left wondering if the heir income tax credit I referred to is correct - or not. I guess I will have to do my own reading.

poseidon1

May I make the observation that when it comes to tax advice generally, and even with regard to the regime around pensions and investments specifically, neither IFAs or FAs should be considered authoritative reference sources either for definitive 'advice' for a particular circumstance or general speculative advice such as in the case of the forthcoming IHT regime for DC pension funds.

They generally do not have the in depth training or highly detailed legislative understanding, so in my view it is unfair looking to them for definitive guidance in this regard.

This is the area where tax trained accountants and solicitors come into the picture, and the ordinary members of the public are likely best advised referring to Internet reference sources, which serve that professional community.

In that vein, see below the Tax Adviser Journal view of what is currently 'known' about the new IHT regime

https://www.taxadvisermagazine.com/article/pension-death-benefits-estate-planning

Of particular note is unless there are last minute changes to the regime, inheriting beneficiaries may also face the egregious possibility of personal income tax liabilties on the remaining pension fund, if death occurs after the age 75 threshold.

This potential double tax on the same pension pot is what should concentrate people's minds in terms of their future estate planning efforts involving their DC pots.

I certainly have to rethink my own strategy, which originally involved leaving whatever remained of my pot, to non British nationals tax resident in Spain.