The government announced that, from April 2027, pensions will no longer be exempt from inheritance tax, meaning any unspent pension pots will be included in your estate for inheritance tax. However, experts have shared a way that could help families beat some of the tax.
The loophole allows those with large pension pots to pass them on to loved ones free of inheritance tax in the form of an income they receive for the rest of their lives. Annuities allow you to take a lump sum from your pension and use it to purchase an income that you can take for yourself or one that continues to pay out to someone else for their lifetime following your death.
According to pension firm Standard Life, 39% of financial advisers expect annuities to become more popular.
People lost interest in annuities in the last decade, but they could become more popular again as savers could possibly pass on anything left in their pension pot free of inheritance tax, once lump sum pension funds become liable from April next year.
Clare Moffat, of pension firm Royal London, says: “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.”
Married couples or those in a civil partnership can already pass on assets to one another free of inheritance tax. Though if you wanted to pass on assets to other family members, an annuity would be a good option, Mail Online reports.
Older Brits with a pension pot could buy an annuity for themselves or one that pays out to a family member e.g a adult child, when they’re no longer around. The child would then only have to pay income tax, not inheritance tax.
Nick Flynn, from retirement specialists Canada Life, says: “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.”
It is important to remember that the income you could get from an annuity with a younger family member would be far less than the income you would get from one for yourself or from one that pays out to a spouse of a similar age, as the policy is likely to pay out for decades longer.
