Experts have highlighted a potential inheritance tax loophole using annuities, as the UK government confirmed that from 2027, pensions will no longer be exempt from inheritance tax. This means any unspent pension pots will be included in your estate for inheritance tax purposes.
What the 2027 Change Means
The Labour Party government has confirmed that starting in 2027, pensions will be subject to inheritance tax. Previously, pensions were exempt, allowing individuals to pass on unspent pension pots tax-free. The change will include pension pots in the value of an estate for inheritance tax calculations.
Annuities as a Solution
Annuities allow you to take a lump sum from your pension and purchase an income that can be taken for yourself or continue to pay out to someone else for their lifetime after your death. According to pension firm Standard Life, 39% of financial advisers expect annuities to become more popular in light of the upcoming change.
Clare Moffat of pension firm Royal London explains: “If you are not married but want your partner to get something when you die – without having to pay inheritance tax – a joint annuity could be a really good idea.”
Options for Unmarried Partners and Families
Married couples or those in a civil partnership can already pass on assets to one another free of inheritance tax. However, for those who are unmarried or want to pass on assets to other family members, an annuity can be a good option.
Nick Flynn from retirement specialists Canada Life suggests: “There's no reason why you can't take out policies for each child. The children would need to be grown up – at least 35 – when the policies are taken out, otherwise they would cost a fortune. But it could also be a good option if you would rather hand over an income than a lump sum that you fear they might spend on a Ferrari.”
Considerations and Limitations
It is important to note that the income from an annuity with a younger family member would be significantly less than one for yourself or a spouse of a similar age, as the policy is likely to pay out for decades longer. Financial advice is recommended to navigate these complex rules and ensure the best outcome for your estate planning.
