Pension inheritance tax from April 2027: six ways to reduce what your family pays

Parts 1 and 2 covered what changes on 6 April 2027 and how to tell whether it affects you. This part is the useful one: what you can actually do about it.

There are six practical options. Most families who plan properly end up using three or four of them together, and the combination usually does more than any single move on its own. None of this requires anything clever or aggressive. It mostly requires doing it early enough to have a choice.

Start with the reassuring part. Your spouse or civil partner still inherits your pension free of Inheritance Tax, exactly as before. Death in service cover from a workplace scheme stays outside the rules. And the two allowances that shelter most estates are unchanged: the £325,000 nil-rate band, plus £175,000 more where a home passes to children or grandchildren, both held at those levels until the end of the 2030/31 tax year. For a married couple leaving a home to their children, that is a meaningful amount of an estate before any tax is due at all. Note: The £175,000 Resident Nil Rate Band starts to be eroded when your total estate for IHT is over £2m and only applies to the main home – not other assets like pensions.

What changes is what happens to money left in a pension when it eventually passes to the next generation. Below is what you can do about that.

What is actually changing, and is it settled?

It is settled, which is the first thing worth knowing, because a lot of what is still online was written when this was only a proposal.

1. Death in service benefits paid from a registered pension scheme.
2. Dependants' scheme pensions from a defined benefit or collective money purchase arrangement.
3. A dependant's or nominee's annuity, where it was bought together with your own lifetime annuity.

1. Could changing the order you spend your money reduce the bill?

For many families, yes, and it is the option with the widest reach because it costs nothing to implement.

Where the freed-up money is invested rather than spent, it carries investment risk. Values rise and fall, so returns are not guaranteed and you could get back less than you put in. Over longer periods investments have historically delivered higher returns than cash savings, though that is not guaranteed and the outcome depends on how long you invest for and your own circumstances.

Who this tends to suit: anyone with a pension larger than they will realistically spend, and other assets they were planning to run down first.

2. Could giving money away now do more good than leaving it?

This is the one that helps twice. It reduces what is eventually taxed, and you get to watch the money do its work.

• £3,000 each tax year, per person, so £6,000 between a couple. Unused exemption can be carried forward one tax year only, and the current year's is used first.
• £250 to as many different people as you like each year. It is all or nothing, so £251 to one person loses it for that person, and you cannot use it on someone you have already used another exemption on.
• Wedding gifts: £5,000 from a parent, £2,500 from a grandparent or more distant ancestor or from one party to the other, and £1,000 from anyone else. The gift has to be conditional on the marriage actually taking place.

One rule underpins all of it: a gift has to be a real gift. Give something away while keeping the benefit of it, and the gift with reservation rules bring it back into your estate. Living in a house you have given to your children is the classic example. There are legitimate ways to give away growth while retaining some access, and they are option six.

The plain point is that money given away is gone, so this suits people giving from surplus rather than from what they might need. Within that, it is the most enjoyable form of planning there is, because you see the difference your money makes while you are still around.

Who this tends to suit: almost everyone, at some level. The £3,000 and the regular-gifts-out-of-income exemptions cost nothing and are available immediately.

3. Could an annuity turn a taxable pot into a guaranteed income?

For people who value certainty, this does two jobs at once. It converts pension capital into an income guaranteed for life, and that capital is no longer sitting there as an unused fund to be taxed when you die.

In recent years, as annuity rates have increased, we have seen more annuities being taken out. This has been reflected in the statistics quoted by some of the industry bodies regarding annuity sales.

The detail that matters, and that almost nobody writes about: if you buy an annuity with a guarantee period and die inside it, the payments that continue to your beneficiary are valued and counted in your estate. A joint life annuity is treated differently, and where a dependant's or nominee's annuity was bought at the same time as your own, it is excluded. So the shape of the annuity does as much work here as the decision to buy one, and getting that right is most of the value.

Beyond that, the trade-off is the familiar one. It is a one-way door, the capital is no longer available for emergencies or for your family, and a level income buys less as prices rise, though you can buy an income that increases from a lower starting point. Your age and health at purchase affect what you are offered.

Which is why it rarely makes sense to annuitise everything. Using part of the pot to cover the bills that have to be paid every month gives you a secure floor, and leaves the rest invested and flexible.

Who this tends to suit: people who want a guaranteed income for essentials, and who have more pension than they need to leave behind.

4. Could insurance pay the bill so your family keeps the assets?

This one solves a different problem. It does not reduce the tax. It makes sure the money is there to pay it, at the moment your family needs it.

Whole of life insurance written in trust pays a lump sum on death that generally does not form part of your estate, so it is not itself taxed. The practical effect is that the house does not have to be sold and other assets do not have to be broken up to settle a bill that falls due within six months. For families whose wealth is tied up in property or a business, that is often the cleanest answer available, because it leaves the estate intact and simply funds the liability.

It suits some people and not others, and the deciding factors are straightforward. Premiums are payable for life and rise with the age at which you start, so it is markedly better value arranged in your fifties or sixties than later. Your health and medical history determine whether cover is offered at all, and an insurer can decline, load the price or exclude a condition. The policy has no cash value, so if premiums stop, so does the cover. And because the sum insured is a snapshot, it needs reviewing as your estate changes rather than being filed away.

The trust has to be set up correctly from the outset, in the right form and with the right ownership, because that is what keeps the payout outside the estate. Trusts and Inheritance Tax planning, and will writing, are not regulated by the Financial Conduct Authority.

Who this tends to suit: families with a known, persistent Inheritance Tax bill and assets they want to keep rather than sell.

5. Could ten minutes of paperwork protect a spouse's exemption?

Of everything here, this is the quickest, the cheapest, and the one most often left undone. It has also just become considerably more valuable.

Your will does not usually control where your pension goes. For most defined contribution schemes, death benefits are paid at the discretion of the scheme's trustees or administrator, who will look at your expression of wish form and normally follow it, though they are not generally required to. Some schemes work on a direction basis instead, where they must pay whoever is nominated. It is worth asking your provider which yours is.

Here is why it matters more from 6^th of April 2027. That discretion has not been removed. What has changed is that the trustees' decision now determines the tax, because the spouse and civil partner exemption is retained, and the scheme administrator has to report to your executors which benefits went to exempt beneficiaries and which did not. In other words, a form that takes ten minutes to update now decides whether part of your pension is taxed at 40 per cent or not taxed at all.

Forms filled in fifteen years ago, before a marriage, a divorce or a grandchild, are doing that job right now. Most people have no idea what theirs says.

Who this tends to suit: everyone with a pension. There is no downside and no cost, only the effort of finding the form.

6. Could a trust let you help your family without handing over control?

Sometimes the reason for not gifting has nothing to do with tax. You want to help, but not to hand over a large sum outright, because the children are young, or you are wary of the decisions that might follow, or you are thinking about what happens if a relationship breaks down, or you may need some access yourself later on.

Trusts exist for exactly these situations. There are structures that let you give away future growth while keeping an income or a right to capital, in a way that works with the gift with reservation rules rather than falling foul of them. Used well, they solve the control problem and the tax problem together, which is why they remain the backbone of a lot of estate planning.

They come with their own tax treatment, including charges that can arise every ten years and when money leaves the trust, plus costs to set up and to run. Some structures reduce Inheritance Tax less than people expect, because the part you keep access to remains yours. They are worth doing properly or not at all. Trusts and Inheritance Tax planning, and will writing, are not regulated by the Financial Conduct Authority, and tax treatment depends on your individual circumstances and can change.

Who this tends to suit: people with more than they need who are not comfortable giving it away outright.

How these fit together

A good plan rarely uses one of these alone. A typical shape is a different order of drawing income, a gifting routine that sits comfortably inside what you earn, part of the pension covering the essentials, and the paperwork tidied up behind it. Each element does a modest amount. Together they can do a great deal.

Three things decide which combination fits you.

1. How much you genuinely do not need. Almost everything here involves giving up access to money or the certainty of having it. The planning is straightforward once that number is known, and impossible before.

1. Your health and your age. Insurance costs less the earlier it is arranged. The seven-year clock only runs while you are alive to run it. This is the whole reason for looking at it while you feel well rather than when something forces the question.
2. What you actually want. Reducing a tax bill, helping your children now, and knowing you will never run out are three different goals, and they lead to different answers. The tax should not be the thing driving the decision.

Making it simple for the people who have to deal with it

One practical point, because it is easy to get right in advance and difficult to fix afterwards.

From 6 April 2027 your executors are responsible for reporting and paying any Inheritance Tax on unused pension funds, with the tax due by the end of the sixth month after death. HMRC has built the machinery to make that workable: your executors can require a scheme to hold back up to half the benefit while the position is settled, and the tax can be paid directly from the scheme itself.

It works well when the paperwork is current and everyone knows what they are dealing with. Up-to-date nomination forms, a clear picture of where the pensions are, and beneficiaries who know they are beneficiaries turn a complicated administrative job into a straightforward one. That is worth more to a family than most of the tax planning.

Common questions

Are gifts to family always tax-free?

Not automatically, but a lot of them are. Gifts become free of Inheritance Tax once you have lived seven years after making them, and several are exempt immediately: the £3,000 annual exemption, small gifts of £250 to different people, wedding gifts within the limits, and regular gifts made out of income. Taper relief only helps where your gifts in those seven years came to more than the nil-rate band, and it reduces the tax rather than the value of the gift.

Will an annuity solve the problem on its own?

It does a lot of the work by converting capital into income, but payments continuing under a guarantee period are counted in your estate from April 2027, and the decision cannot be reversed. Using part of the pot rather than all of it is usually the better-balanced answer.

Is whole of life insurance expensive?

It depends on your age, your health and the cover you want. Arranged in your fifties or sixties against a bill you can already see coming, it is often the most efficient answer available. Arranged much later it can cost more than the problem justifies. The only way to know is to get the figures for your own situation.

Can I just leave everything to my spouse and deal with it later?

You can, and there is no Inheritance Tax at that point where they are a long-term UK resident. It defers the question rather than answering it. When the survivor dies, the same decision arrives with one estate instead of two, fewer exemptions available and less time to use them, which is why couples usually plan together.

Should I stop paying into my pension?

For most people, no. A pension remains a tax-efficient way to save for retirement, and this change affects what happens to money you have not spent rather than the value of saving in the first place. Tax treatment depends on your circumstances and may change over time, so the value of any relief will vary from person to person. Whether it still stacks up for you specifically is worth putting numbers to.

Where to start

If you have read all three parts and you still cannot tell whether any of this applies to you, that is completely normal. The answer depends on numbers that have probably never been added up in one place, and it is the adding up that produces the answer, not the reading.

That is the conversation we have with people. We look at the pension, the wider estate and what you actually want to happen, and we tell you which of these six are worth pursuing for you and which are not. Sometimes the honest answer is that you are already in good shape and there is nothing to do, and that is a perfectly good outcome to leave with.

We offer an initial conversation with no obligation, for people aged 50 and over across Hampshire, Surrey, Berkshire and London.

Nothing in this article is a personal recommendation. It is general information about how the rules work, and what is right for you depends on your own circumstances.

Get in touch at wilcoxday@sjpp.co.uk or call 01252 984 733.

Wilcox Day Wealth Management is based in Fleet, Hampshire, and works with clients across Hampshire, Surrey, Berkshire and London, including Farnham, Camberley, Farnborough, Basingstoke, Hook, Odiham, Guildford, Woking, Reading, Bracknell and central London.

The full series

• Part 1: What the April 2027 pension inheritance tax change means for you and your family. Click here
• Part 2: Working out the personal impact, including how Inheritance Tax and Income Tax can both apply. Click here
• Part 3, this article: Six ways to reduce what your family pays.

Trusts and Inheritance Tax planning, and will writing, are not regulated by the Financial Conduct Authority.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.