IHT 2027 Pension Changes: Using JLSD Term Policy vs Alternatives?

JamTomorrow

I'm looking for any critiques or pitfalls on a temporary IHT strategy I’m considering as I look out to the IHT changes from April 27.

The Situation:

The Estate: Expected to peak at around £2.5m when my wife and I hit age 60.

Long-Term Plan: Draw down excess SIPP income to gift to the kids or move into ISAs, stopping capital growing in the SIPP and avoiding it being taxed twice (my understanding is as IHT at 40% and then marginal rate of income tax when my kids access the SIPP)

The Problem: My main concern is the risk of us dying together or in quick succession in the near term (e.g., before 60), leaving the kids with huge complexity and an immediate 40% IHT bill during peak grief.

The mitigation i'm considering based on options I've been able to identify:
I’m looking at a Joint Life Second Death (JLSD) term policy (written in trust) to cover the gap to reducing SIPP balance from annual withdrawls. I’m weighing up a 20, 25, or 30-year term to take us to age 70, 75, or 80.

Questions:

Is JLSD the best tool for this? Or is there a cleaner alternative for a temporary 20-to-30-year IHT gap?

Sizing vs. Inflation: With frozen Nil-Rate Bands, how do you size the sum assured? Do you opt for an increasing/index-linked policy, or just buy a fixed chunk based on what is affordable now, eg £600k for me to cover estimated peak estate value (in todays money).

The Term Trap: Does anyone regret using a term-capped policy for IHT rather than a Whole of Life contract? The obvious risk is health drops during the term and we can't extend past 75/80 if the gifting strategy falls behind schedule.

Any thoughts on blind spots or structural flaws appreciated. Are there other options I should explore?

JoeCrystal

Well, I actually had to Google that term since this is first time I seen that term on this pension forum. I do wonder if this is something you should be paying IFAs to advise you on? You are clearly well off in this case.

Marcon

Are there other options I should explore?

Definitely one for professional advice based on a full understanding of your circumstances, not just a few paragraphs of background information.

Dead_keen

The gifting makes sense to me.

Moving money from a SIPP to an ISA doesn't makes sense to me (extra IT now vs none if you die before age 75, no change to overall IHT (other than in relation to IT paid)).

The IHT based on your peak £2.5m is more than £600k as you lose most of year RNRB (assuming you have no exemptions like BPR or APR). But death bed gifts can be used to reduce that issue (seven year rule does not apply to taper).

I have no idea of what proportion of your £2.5m is in equity investments, but bearing in mind there is no sign of the IHT thresholds rising, it doesn't take much of a nominal return for the £2.5m to not be your peak.

If your concern really is "huge complexity" then why not spend some time helping them out by explaining the issues that will arise and who can help them. The key difference with the policy seems to be preventing the need to sell assets (it doesn't change the need for probate or the IHT forms). Selling is not really an issue with cash/gilts/listed equities. The policy just seems to remove the short-term need of (i) selling illiquid assets quickly, or (ii) paying IHT by installments.

If illiquid assets are your complexity, why not just take the policy out based on the difference between the actual IHT due and the liquid assets?

poseidon1

Joint life 2nd death policies ( in trust) have long been a method to provide beneficiaries with a cash sum ( outside the deceased estate ) to assist with settlement of IHT on 2nd death, so OP would be following a very well trodden estate planning path.

For many in the OP's DC pension pot position, I have no doubt IFAs will be putting forward such policies as part of an overall mitigation strategy. However whether a cheaper term policy makes sense compared to a more expensive whole of life policy which pays out regardless of when death occurs, will likely depend how quickly it is anticipated the DC pot will diminish over the anticipated joint life pension drawdown term.

However, re the possibility of double tax ( IHT & Income tax) imposed on pension beneficiaries on 2nd death, It appears the potential injustice of this has been recognised in the published updates to the expected draft statutory provisions. Regulations will apparently be put in place to mitigate this by allowing a measure of income tax relief on pension drawdown, equal to the IHT attributed to the beneficiary' s pension pot. The following briefing from Aberdeen explains ( IHT from 6 April 2027 - subheading) -

https://techzone.aberdeenadviser.com/public/pensions/Tech-guide-pensions-IHT