Editor's note: This brief was summarised by The Property AI Team from a report by Property118. Read the original article for full details.
Pension Inheritance Tax: Annuity and Whole of Life Trust Idea for Landlords
From 6 April 2027, most unused pension funds and pension death benefits will enter the inheritance tax calculation. A Property118 article by Mark Alexander sets out an idea for property-owning families who have built substantial pensions but rely on rental income to support their lifestyle.
The article explains that many such families hope to leave their pension to the next generation. For families already above their available allowances, the forthcoming change to pension inheritance tax treatment changes the picture considerably.
The idea outlined
Mark Alexander says his Financial Adviser, Richard Beardsworth, recently sent him details of a specialist annuity arrangement with potential inheritance-planning benefits. This prompted a further thought he wanted to share with Property118 members: could pension income not needed for yourself pay for an inheritance for your family that normally falls outside your estate?
The concept described is straightforward. Pension money purchases an annuity, which pays an income. After allowing for income tax, some or all of that income could pay the premiums on Whole of Life insurance written into a suitable trust. When the insured person dies, a valid claim pays the agreed insurance benefit to the trustees for the intended beneficiaries. With the policy and trust correctly arranged, those proceeds normally fall outside the insured person's estate for inheritance tax.
For a property-owning family, the article suggests that could provide money to meet the inheritance tax bill and help preserve properties they would otherwise have to sell. The tax on the property estate is still calculated in the usual way; the policy provides funds to help pay it.
Illustrative figures
The article compares a pension worth £1 million at death, with the whole amount exposed to the standard 40% inheritance tax rate after allowances and exemptions, which would leave £600,000 before any income tax payable by the pension beneficiaries. It contrasts this with a £1 million insurance payout into an appropriately arranged trust, outside the insured person's estate, where the trustees could receive the full £1 million without that £400,000 estate IHT deduction.
The article stresses this is a comparison of two amounts at death, rather than a calculation of the overall return from either approach. It notes that whether the arrangement actually leaves the family better off depends on income tax, costs, inflation and what the pension would otherwise have grown to or retained.
On premiums, the article refers to an earlier piece in which the indicative premium for £1 million of cover for a healthy man aged 60 was £1,328.20 a month, or £15,938.40 a year. These were illustrative figures published in May 2026, not a current quotation. Assuming the premium and £1 million cover remained fixed, the article sets out totals of £318,768 over 20 years, £478,152 over 30 years and £637,536 over 40 years.
The annuity would need to fund those premiums after income tax. For example, if all the relevant annuity income were taxed at 40%, funding £15,938.40 of annual premiums would require £26,564 of gross annual income. The article says Richard would need to establish whether the available pension could support that income sustainably.
Source: Property118