Government publishes more details of reforms of inheritance tax on pensions

30 October 2025

More details about plans to bring pension funds and death benefits into inheritance tax (IHT) have been published. This includes clarification of what this will mean for annuities that include death benefits.

In October last year we reported on government plans to bring pensions into inheritance tax. This would mean that most unused pension funds and death benefits would be included in the value of a person’s estate for inheritance tax from 6 April 2027. (Death in service benefits where the person who died is still working will be excluded from IHT.)

At that time, a technical consultation process had begun, giving the industry an opportunity to express its views on how the changes might be implemented. Since then, there has been considerable comment and controversy about the proposals, alongside the consultation itself.

The technical consultation is now over, and the government has published a summary of responses. Several areas were covered, most of which were not specifically related to annuities. Instead, they covered technical points about how someone’s IHT payments would be administered, and by whom.

The summary responses document also contained clarification on the scope of the reforms. This included confirmation relating to IHT and annuities.

How will the new IHT rules affect annuities?

The government has confirmed that death benefits left to beneficiaries via joint life annuities will NOT be liable to IHT. Our understanding is that other types of death benefits within annuities would be liable, although the final details will follow in due course. 

Here is a summary of the current tax position for annuities:

Currently all death benefits are outside your estate for inheritance tax purposes and therefore are inheritance tax free. There is however a different treatment for income tax if you have an annuity and pass away:

• If you die before age 75 - death benefits are usually income tax-free, as long as your total pension savings are under £1,073,100 (known as the Lump Sum and Death Benefit Allowance, or LSDBA).

• If you die at age 75 or older - death benefits will be taxed at your beneficiaries’ income tax rate.

Here is our understanding of what the proposed pension IHT changes will mean: 

It is expected that pensions and pension income products will be included within inheritance tax rules from April 2027. Although the final rules are yet to be confirmed, the intention is that all annuity death benefits with the exception of joint life lifetime annuities will be included in your estate, and therefore would be liable to inheritance tax. 

Of course, for most people these changes will not affect them at all, because:

• IHT only applies if your estate is over the threshold of £325,000 – or £500,000 if the estate includes a house which was the main residence and is passed on to blood relatives. 

• IHT isn’t due at all on estates left entirely to your spouse, civil partner or charity.

How annuity death benefits work

Since there is likely to be a difference in IHT liability for different types of annuity death benefit, it may be useful here to summarise these benefit options.

Joint life:

• Your income payments continue to be paid to your nominated beneficiary (typically your spouse or partner) should you die before them, for their lifetime or a fixed term.

• You decide the percentage of your annuity income that will continue to be paid: the greater the income that’s paid after you die, the smaller your payments while you’re alive.

• Our understanding is that lifetime annuities WOULD NOT be liable for inheritance tax under the government’s plans. However, we are awaiting confirmation on the treatment of fixed-term annuities for IHT as this is currently unclear. 

A guarantee period:

• You choose for your annuity provider to pay income to your beneficiary for a guaranteed term, up to the provider’s maximum, even if you pass away within that period. 

• For example, if you choose a ten-year guaranteed period and die five years after taking out your annuity, your beneficiary will continue to receive the income for another five years. 

• Some providers will offer your beneficiary the option of taking a lump sum when you die instead of income. 

• Our understanding is that these annuities WOULD be liable for inheritance tax under the government’s plans, but only if the income or lump sum is left to someone other than your spouse or civil partner.

Value protection:

• Your annuity provider will pay a lump sum to your beneficiary when you die. 

• This payment would reflect how much money is left in your pension fund after taking any tax-free cash and income, and how much of it you choose to protect. 

• Our understanding is that these annuities WOULD be liable for inheritance tax under the government’s plans, but only if the income or lump sum is left to someone other than your spouse or civil partner.

Please see What happens to an annuity when you die? for more information about how annuity death benefits work.

What happens next?

We will continue to monitor the government’s proposed legislation and keep our readers and customers informed of any developments.

As always with taxation matters, we encourage you to talk to a suitable financial adviser if you are thinking about your estate’s future IHT liability and wish to make appropriate choices about your pension saving or pension income options.