Investment bonds are emerging as a key tool in financial planning to address pension and inheritance tax changes.
Pensions will count as part of a person’s estate for inheritance tax (IHT) starting in 2027. It is expected that these changes to IHT rules will influence financial planning behaviours for wealthier savers. This move is likely to be encouraged by pension providers, who are expected to handle the reporting and payment of any IHT due on pensions to HMRC.
NFP partner Martin Parish says that integrating investment bonds into workplace platforms, alongside retail options, will help make financial planning smoother and more transparent for consumers.
Aegon is one provider considering this shift, along with Standard Life, where leadership roles are merging between retail and workplace under Gail Izat.
He says: “Investment bonds can be put in a trust and provide an ongoing revenue stream, allowing withdrawals of up to 5 per cent of the capital without tax liabilities.”
This flexibility makes investment bonds appealing for estate management. With pensions potentially taxed for inheritance, bonds in trust can be passed on to beneficiaries without IHT, allowing surplus funds to be transferred more efficiently while providing income.
Parish also notes that employers are concerned about value for money, as employees withdrawing pension benefits as cash may face high tax charges, losing much of the company’s contributions.
He adds: “Value for money is a key topic, with employers concerned that members are extracting pension benefits as cash at retirement and suffering punitive tax charges, yet the company may have paid in thousands and thousands of pounds for that employee over the years, for a lot of it to be lost. Therefore, being able to access better information or better guidance or advice for those members who are pre- and at retirement will be a key market development.”
Workplace providers are increasingly integrating retail options into their offerings, aligning workplace solutions more closely with the retail market to better serve consumers. Workplace solutions, such as pension schemes, ISAs, and general investment accounts, are already evolving to mirror retail offerings.
Parish adds: “Our expectation is that the workplace will start to develop propositions or solutions for consumers and end users that are equivalent and match the retail market. Providers that offer retail platforms, such as Aegon’s ARC, that also use ARC in the workplace, are likely to integrate offerings.”
Ultimately, Parish believes workplace platforms will become central to managing both pension assets and personal wealth.
He notes: “Workplaces are going to increasingly become the natural place that people accumulate both their pension assets and wealth, plus their wider personal wealth through things like Isas and general investment accounts, but will also start to source their retirement solutions too.”
