Financial advisers are reporting heightened demand from clients seeking strategies to mitigate the impact of new inheritance tax rules on pensions set to take effect from April 2027. Under the upcoming regulations, pension balances exceeding certain allowances will be subject to a 40 percent inheritance tax upon the account holder’s death.
A growing number of specialists are highlighting a lesser-known option involving annuities that may help individuals pass on pension wealth without triggering this tax. Annuities, financial products that convert pension pots into guaranteed income streams, have seen a resurgence in interest after falling out of favor following the 2015 pension freedoms reforms. These reforms initially allowed savers to retain control of their pension investments and withdraw lump sums, which could be passed on free of inheritance tax if remaining in the pension pot. However, the new tax rules will subject lump sums left in pensions to inheritance tax, whereas funds converted into annuities may avoid this liability.
The strategy involves using pension funds to purchase an annuity that continues paying an income to nominated beneficiaries after the purchaser’s death. This approach is most straightforward for married couples or civil partners, who already benefit from inheritance tax exemptions when transferring assets between each other. Where the annuity option gains traction is among those seeking to provide for partners or family members who are not spouses, as the income can be paid to them without incurring inheritance tax.
Clare Moffat of Royal London notes that a joint annuity can be particularly advantageous for unmarried partners. Experts also suggest the concept could extend to adult children or other relatives, provided they meet certain age criteria—typically over 35—to ensure the cost is manageable. Nick Flynn from Canada Life points out that annuities for children can provide a steady income rather than a lump sum that might be spent quickly.
Financial adviser William Burrows provides an example: a 75-year-old with £100,000 in pension savings could purchase a joint life annuity providing approximately £6,094 annually for themselves, with payments continuing to a 45-year-old child after their death. Alternatively, an inflation-linked annuity could start at a lower amount but increase over time, potentially offering greater long-term benefits for the beneficiary.
Standard Life reports increasing interest in annuities amid the looming tax changes, with the share of annuity quotes for customers over 75 rising significantly since 2024. Aside from inheritance tax benefits, annuities also facilitate gifting income regularly to family members free of inheritance tax—a relief not available when transferring capital outright from a pension.
Despite these potential advantages, experts caution that annuities are not a universal solution. Once purchased, annuity income cannot be increased through investment growth, and payments cease upon the death of the named beneficiaries. Additionally, recipients must pay income tax on annuity payments.
Clare Moffat emphasizes that for many, especially those intending to pass pensions to spouses, concerns about inheritance tax may be minimal, since pension drawdowns during retirement reduce the amount remaining on death.
As the April 2027 deadline approaches, financial advisers expect further interest in annuity-based planning as families seek ways to manage inheritance tax exposure on significant pension holdings. However, they recommend individualized advice to determine the most suitable strategies given personal circumstances.