Change Mindset Inheritance Tax on Pensions Use Fixed Term Annuity Excess Income Gifts
Published / Last Updated on 05/08/2025
We have already covered the fact that in the Autumn Budget 2024, Chancellor Rachel Reeves announced that unused pension funds will be included in the estate calculation for inheritance tax (IHT) purposes from April 2027 and we have suggested that people need to change their mindset on pensions.
See IHT on Pensions - Reset Your Strategy
Leaving Unused Pension Funds to Children (Before April 2027)
Many of us have been saving and investing in pension funds with the plan to use flexible access drawdown for capital/income access and leave the balance to loved ones, e.g.:
- To children inheritance tax free, or
- To your surviving married spouse/civil partner inheritance tax free with the surviving spouse/civil partner then subsequently leaving any unused pension funds to children, inheritance tax free.
Unused Pensions Funds (After April 2027)
As mentioned above, gifts of pension funds to spouses remain inheritance free, but if you leave your unused pension funds on 1st death or 2nd death to children or other loved ones such as your common law/unmarried partner, these will be included in your estate for IHT calculation purposes. This is a huge ‘tax grab’ by the Chancellor and will reap much revenue over the coming years for HMRC and the Treasury.
Gifts from Regular Income
- For irregular, ad hoc gifts of lump sums to loved ones, you must survive for 7 years for the gift to be outside your estate and free from IHT.
- Unlimited gifts of regular income (provided your lifestyle standard is not reduced) are immediately outside your estate for IHT purposes and you do not have to survive for years
- HMRC will check this on death via the IHT 403 form see https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf
- On page 8 of this form, gross income less taxes = net income, less expenses = Excess Income.
- Gifts from excess income are immediately outside the estate.
Given the changes to unused pension funds in the estate, it makes sense for us to explore the reduction of unused pension assets over the coming years.
We have already suggested having our fees paid from your pension funds as well as setting up regular withdrawals under flexible access drawdown and making sure a Tax code is issued to the pension scheme so that it is treated and taxed as regular income.
See Fees from Pension Reduce IHT Drawdown and IHT Gifts
Consider: Buying An Annuity to Increase Regular Income and Excess Regular Income
We visited the ‘MoneyHelper’ Annuity Comparison Service (part of the FCA) and compared both conventional, whole of life annuities and fixed term annuities.
| IHT Annuity Planning - £100,000 invested, Level Annuity Payments, Healthy, No 'Bolt Ons'. | Paid Monthly In Arrears, No Spouses Benefits, No Guarantee Period, No Cash In Value. | ||
| Whole of Life | 15 yr Fixed Term | Total Pay Out | |
| Age Today | Annuity pa | Annuity pa | 15 Years |
| 60 | £7,027 | £9,310 | £139,650 |
| 65 | £7,915 | £9,381 | £140,715 |
| 70 | £8,828 | £9,520 | £142,800 |
| Whole of Life | 10 yr Fixed Term | Total Pay Out | |
| Age Today | Annuity pa | Annuity pa | 10 Years |
| 60 | £7,027 | £12,527 | £125,270 |
| 65 | £7,915 | £12,555 | £125,550 |
| 70 | £8,828 | £12,610 | £126,100 |
| Whole of Life | 5 yr Fixed Term | Total Pay Out | |
| Age Today | Annuity pa | Annuity pa | 5 Years |
| 60 | £7,027 | £22,168 | £110,840 |
| 65 | £7,915 | £22,168 | £110,840 |
| 70 | £8,828 | £22,168 | £110,840 |
Source: https://www.moneyhelper.org.uk/en
Whilst the results were not a surprise, they are attractive, and a fixed term annuity may now be even more attractive if you wish to increase regular income and therefore increase or create excess regular income that can then be gifted to loved ones and immediately be outside the estate for IHT purposes.
Change your mindset, change your retirement and inheritance tax planning strategies right now.
Talk to us about our ‘In Retirement, Inheritance Tax, Later Life and Care Planning Strategy Review’.
See: Later Life & Inheritance Tax Review
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