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: Flexible Annuity Option Flagged for Landlords
A Property118 article by Mark Alexander sets out a flexible pension annuity arrangement his IFA brought to his attention, aimed at landlords with substantial pension funds they had hoped to leave to their families. The piece notes that most unused pension funds and pension death benefits come within the scope of inheritance tax from 6 April 2027.
Alexander writes that the discussion concerned landlords whose rental income already covers their living costs and who hold substantial pension funds intended for their families. He says his IFA, Richard, introduced him to a particular type of flexible pension annuity, and that what caught his attention was the combination of retirement income and a mechanism through which any remaining investment value could pass to the family, potentially benefiting from inheritance tax relief.
How the Arrangement Is Described
According to the article, an annuity is usually associated with exchanging pension savings for retirement income. Under this arrangement, the income is supported by investments, and the client can separately purchase a preference share linked to the assets supporting their annuity. When the client dies, the annuity ends, and the preference share provides a route for any remaining value to pass to their estate.
The article states that the share may qualify for Business Relief, potentially reducing or eliminating the inheritance tax attributable to its value. That possibility is subject to conditions, including normally owning the share for at least two years, its continuing qualification for relief and the available relief allowance. The share forms part of the estate; the potential benefit comes from the relief claimed against it.
Income Funding Insurance Premiums
A further possibility is raised for landlords whose property income already meets their everyday needs: whether the annuity income, after income tax, could fund Whole of Life insurance premiums. With suitable trust arrangements, the article says, the insurance proceeds can normally be paid outside the insured person's estate.
The article describes the potential combination as taking pension income to fund insurance cover, while any remaining value linked to the preference share may separately qualify for Business Relief. It adds that whether the two work well together depends on the individual's circumstances, the insurance terms and the advice they receive.
Practical Considerations
The article lists practical considerations: investment values and annuity income can fall, charges apply, and the annuity cannot normally be surrendered after its cancellation period. Insurance availability and cost depend on age and health, and premiums must remain affordable to maintain cover. Tax treatment depends on individual circumstances and can change.
Alexander describes it as an income-producing retirement arrangement with potential estate-planning benefits that deserves an individual assessment, particularly where pension savings are intended to support both retirement and the next generation. The article states that Property118 is not acting as a financial adviser and is not a recommendation to purchase an annuity, preference share or insurance policy.
Source: Property118