Pension and inheritance combinations – protecting the estate into the future
21 November 2025Recently, it has felt as though many tax nets are tightening and I am sure the Budget 2025 will add to the overall tax take that many are bearing. Often, one change on its own can feel acceptable. However, it can be the combination of existing rules and new regulations that combine to give a different (and potentially unforeseen) calculation as to the tax burden that might apply.
As an example, we know that unused pension funds, held in plans such as personal pensions / income drawdown arrangements, and passed on as an inherited pension on death will become subject to inheritance tax from April 2027. Transfers between spouses should be exempt.
Another historic pension rule is that on death unused pension funds that remain in place post the age of 75 are chargeable to tax at the recipient’s highest marginal income tax rate, which might be 20% or 40% (or higher!). Based on current legislation, it is the combination of this old rule and the new inheritance tax rule that could see an effective ‘double-whammy’ of tax taken from an inherited pension fund post April 2027.
As an additional note, if a client has a high value estate, close to £2M, and passes away over the age of 75 and after April 2027, their pension fund would form part of their estate and could take their overall estate value over £2M. From that point, the residence nil rate band (currently £175,000 each where allowed / applicable), begins to taper away. Perhaps a ‘triple-whammy’ of tax!
For some, the attraction of maintaining significant pension funds into their old age has waned and some have made changes to look at ways of rethinking their overall financial planning to potentially mitigate a future tax position. Readers of our website and blog pages will know that we are advocates of a regular review.
One potential option is to consider insuring the future inheritance tax liability and I understand that many have visited or indeed revisited this position to see if cover can be arranged in a cost-effective manner. Bespoke cover can be arranged, subject to successful underwriting / medical underwriting, for the whole of life, or for a fixed term, to effectively put up an umbrella of cover to protect the estate, perhaps whilst other changes are made. The balance between protection cost versus overall protection cover needs to be considered carefully.
We would recommend that any life cover policy is written in trust to place the proceeds outside the estate for inheritance tax purposes. Many providers can offer a trust wording, and Trustees would need to be appointed; however, some may prefer to take their own individual legal advice before proceeding.
As rules and regulations change, evolve, and as we can see above sometimes combine, reviewing your financial planning is usually worthwhile.
No individual advice is provided during the course of this blog.
Please do contact the team at Chapters Financial for your pension, protection and financial planning.
Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899
