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

mrklaw

look on the bright side - if you die before 75, while you may be exposed to IHT for a portion of the pensions, they’ll be inherited tax free.

JamTomorrow

https://forums.moneysavingexpert.com/discussion/comment/82036276#Comment_82036276

Thanks for the reply. You may well be right that an IFA will be part of the final execution, but my approach has always been to educate myself on the options first and get the wisdom of crowds from MSE. That way, if I do sit down with a professional, it is an informed, collaborative discussion rather than a passive lecture.

The collective knowledge share on MSE over the last 30 years has been invaluable to me. It has helped minimize the impact of my mistakes, guide better decisions, and allow compounding to do its heavy lifting. It has put us in good shape today, though I don't feel "wealthy," just comfortable.

I also suspect that more and more regular forum members are going to find themselves looking up terms like JLSD very soon.

Under the April 2027 rules, a typical retiree couple who have done well but aren't "mega-rich" (say, a £750k mortgage-free house, 2 x £750k SIPPs, and £250k in ISAs) will suddenly face a significant, structural IHT liability that simply didn't exist before April 27. The goal here is just to figure out the most robust way to manage that shifting landscape or do nothing. For me I think it will be a low risk, high impact outcome and still forming an opinion as to whether I want to do anything about it at all.

JamTomorrow

https://forums.moneysavingexpert.com/discussion/comment/82036285#Comment_82036285

Thanks for the challenge, this is exactly the kind of pushback I was looking for.

You make a very fair point on the liquidity. With at least £1m of the estate held in highly liquid equity ETFs, my son (who is the executor) wouldn't face the nightmare of a forced property fire-sale. Liquidating a few institutional ETFs to settle the HMRC bill is straightforward, so I am likely overestimating the administrative friction here due to an emotional aversion to a potential £600k IHT bill.

The Peak Estate Risk: You are spot on about nominal equity returns outrunning a frozen threshold. If I stick to my current plan of only drawing down to the top of the 20% bracket, market growth could easily shatter my £2.5m "peak" estimate. Stepping into the 40% bracket to fund more aggressive gifting might have to be the trade-off to keep a lid on the compounding estate.

JamTomorrow

https://forums.moneysavingexpert.com/discussion/comment/82036326#Comment_82036326

Thanks for that link. I hadn’t picked up that specific update to the draft statutory provisions. Knowing that the future Income Tax calculation will factor in the IHT already paid removes the worst-case "double tax" penalty. It definitely takes the sting out of the post-75 risk.

If I do take out a JLSD policy, it will absolutely be a Term policy rather than Whole of Life. The cost differential makes WOL a non-starter for me as I spoke with a broker yesterday and the numbers were beyond what I would be prepared to pay with Whole of Life being ~£400/month for £600k coverage. 25-Year Term (to age 75) was ~£65/month for £600k coverage and paying roughly £20k over 25 years to guarantee a £600k payout inside a trust, offsetting the immediate IHT liability during the highest risk window, is a tempting hedge but one I will continue to sleep and reflect upon. No rush.

kermchem

I was the beneficiary of my parents JLSD WOL policy, which turned out to be unnecessary for IHT purposes given the changes in thresholds between 1990 and 2016 - second estate just crept under threshold, and that parent lived a long life. Pick your trustee(s) with care - they will have forgotten or died by the time the policy is needed. Ask your broker / IFA how the premiums might increase with 10, 15 or 20-year reviews. And in my case the policy / life company had been bought by one of those companies that consolidate old life companies - they were slow and were the last bit of second parent's estate to pay out (yes, in trust, and not part of the estate)

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82037137#Comment_82037137

Agree, Whole of life cover especially in your case of a potentially long risk period, can be very costly but may suit others with much deeper pockets by way of their disposal income and larger asset base they may wish to protect.

I noted your comment about pension draw down at a level that will trigger 40% tax in order to help forstall your DC pot continuing to appreciate above your withdrawal rate. I believe that will likely be a course of action more people will have to consider taking - just a question of what you do with that surplus income if not spending or giving it away. Funding children or grandchildren's SIPPs/ISAs perhaps?