There is growing evidence wealthier savers are looking to protect large DC pots from inheritance tax, with pensions due to be included in the value of people’s estates from April 2027.
Pensions consultants LCP say clear trends are starting to emerge as to how people are using assets in retirement, with a surge in sales of whole-of-life policies and annuities being purchased with larger DC pots.
LCP says the relatively long-lead in to this changes, which was announced in 2024, has given financial advisers the opportunity to consider a range of mitigation strategies.
LCP points to Association of British Insurers (ABI) figures showing a surge in the number of annuities bought with larger pension pots. Over there past year 31 per cent increase in sales of annuities over £250,000, and a 54 per cent increase in annuities valued at over £500,000.
Annuities provide a lifetime income stream, and enable holders to gift some or all of this income to heir tax-free using the ‘normal expenditure from income’ exemption.
LCP also points out there has been a 92 per cent year-on-year increase in sales of whole-of-life policies. Thee payout a guarantee lump sum when the saver dies, which is free of IHT provided the policy is set up under trust. Alternatively these payouts could also pay for any future IHT bill.
The Government has said that the decision to include pensions within IHT calculations will bring a further 10,000 estates into IHT for the first time and will increase the death duties due for a further 40,000 estates.
There has been criticism from the industry about the implementation of these plans.
LCP partner Steve Webb says: “For many years, one of the attractions of DC pensions has been their favourable treatment under IHT rules, especially for those with larger pots.
“But the Budget 2024 announcement has changed things, and people with larger pots are now exploring a range of strategies to reduce any potential IHT bill for their heirs.
“DC pension providers can expect to see changing behaviour amongst savers with the largest pots, with more interest in drawing down more rapidly for gifting or purchase of a whole-of-life policy, or even using the whole pot for annuity purchase. Providers may find that the largest pots disappear the quickest post-retirement”.
Royal London pensions and tax expert Clare Moffat adds: “There is a wide range of options open to those looking to revise their post-retirement strategy in light of the forthcoming imposition of IHT on pensions.
“It is clear that there is growing interest for clients who might be affected by IHT in financial products such as annuities or whole-of-life policies.
“But the options are complex and it may be worth an inheritance tax bill if that makes family members better off. Most people would benefit from taking professional financial advice so they can work out the best course of action for their specific circumstances.”