Families should now use life insurance to cover pension inheritance tax bills, advisers warn
From April 2027, pensions will be included in inheritance tax calculations for the first time, making protection planning urgent.
For nearly a decade, the standard advice has been simple: spend other assets in retirement and leave your pension untouched, because it would pass to your family free of inheritance tax. From 6 April 2027, that advantage disappears. Most unused pension funds and death benefits will now be included when working out whether an inheritance tax bill is due on death, say financial advisers.
The change, confirmed in the Finance Act 2026, affects families with meaningful pension savings alongside other assets like property or savings. For someone dying at 75 or over, the combined effect can be particularly steep: inheritance tax of up to 40% on the pension, followed by income tax on what beneficiaries withdraw, can leave families facing an effective combined rate as high as 67%. Financial advisers are now recommending that families consider writing a life insurance policy in trust to cover a prospective inheritance tax bill, so beneficiaries aren't forced to find cash from other sources to settle the tax before receiving the pension funds. The key, as with all life insurance, is that the policy itself must be written in trust to pass the payout outside the estate, free of inheritance tax.
Based on reporting by Temple Wealth Management (27 July 2026). Information only, not advice.
Information only. This is general information, not financial, tax or legal advice, and not a personal recommendation. Tax rules depend on your individual circumstances and can change. Please speak to a qualified, FCA-regulated adviser or a solicitor before acting.