An increasing number of individuals are exploring the use of lifetime annuities as a strategy to protect pension wealth from inheritance tax (IHT), particularly in anticipation of regulatory changes taking effect in April 2027. Experts report a growing interest among parents seeking to transfer their pension assets more efficiently to adult children while minimizing the tax burden on heirs.

A lifetime annuity is a financial product purchased from insurers that converts pension savings into a guaranteed income stream for life. A variant known as a joint lifetime annuity can extend payments to a nominated beneficiary—such as an adult child—after the original annuity holder’s death. This approach could potentially shield pension wealth from the high IHT rates applied to estates exceeding the current £325,000 threshold.

To avail of this method, the annuity must be set up jointly with the beneficiary at the outset. The beneficiary does not have to be financially dependent on the annuity holder, expanding its applicability beyond traditional dependent relationships. Mark Ormston, chief compliance officer at Retirement Line, noted an uptick in inquiries about such products as upcoming tax changes will bring pensions into the IHT net, increasing the stakes for estate planning.

Despite the growing interest, options remain limited. Industry veteran Steve Hunt, with over four decades of experience in pensions and insurance risk management, surveyed major UK annuity providers and found only Just Retirement and Canada Life currently offer policies that accept adult nominees from age 40. This reluctance stems from the significant longevity risk insurers face, given that payments might be required for several decades after the original annuity holder's death.

Hunt illustrated the potential application with an example: a 75-year-old father who purchases a lifetime annuity designed to pass income to his 45-year-old daughter until her death. This method differs from leaving a pension pot untouched, as the annuity represents a deployed asset which, under certain conditions, can limit the estate’s exposure to IHT. Nonetheless, this approach carries risks and is unavailable from most providers.

Insurers’ caution is primarily driven by the longevity risk associated with naming younger beneficiaries. Adam Cole, a retirement specialist at Quilter, explained that an adult child named as the second annuitant may receive payments for 40 or 50 years, a duration that requires careful pricing, ample data, and substantial reinsurance. These factors reduce the income available to the original purchaser, as longer payment horizons diminish the product’s yield.

The irreversible nature of annuity contracts, limited competition, and potential tax implications further complicate the use of joint lifetime annuities for inheritance planning. Income paid out after the original holder reaches age 75 is treated as earned income, subject to personal income tax for the beneficiary, whereas payments made before age 75 remain tax-free.

With pensions set to enter the IHT net in the UK starting April 2027, experts anticipate growing demand for alternative estate planning vehicles like joint lifetime annuities. Adam Cole suggested this shift might encourage more providers to enter the niche market, potentially increasing consumer options in the future.