The decision to include unspent pension pots in the IHT tax net - announced in the 2024 Budget - is leading to larger pots being run down by those seeking to reduce potential tax bills, according to LCP partner Steve Webb.
The former Pension Minister reckons larger DC pots are starting to be run down much faster or used in full to avoid IHT.
Mr Webb said: “For many years, one of the attractions of DC pensions has been their favourable treatment under inheritance tax 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.”
He said DC pension providers should expect to see changing behaviour among 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.”
Under the change, due to be implemented in April 2027, the value of unspent DC pots, as well as certain DB death benefits such as ‘death in deferment’ lump sums, will be added to the value of the estate when IHT is worked out. The Government estimates that this will bring around 10,000 estates per year into IHT for the first time as well as increasing IHT bills for a further 40,000 estates.
But the long lead time has given financial advisers the opportunity to consider a range of strategies to mitigate the impact of the change, and this is most likely to be seen for larger pot sizes where the IHT risk is greatest, Mr Webb predicted.
He said two financial products which are already seeing increased market activity are annuities and whole of life policies.
The ABI recently reported a surge in annuity purchases with larger pots with sales of annuities over £250,000 rising by 31% year-on-year in 2025, and sales of annuities valued at over £500,000 climbing by 54%, while industry sources suggest a surge in demand of whole of life policies, with an increase of 92% year on year reported in Spring 2025.
With annuities, savers can convert some or all of their DC pot into a lifetime income stream, and potentially gift the annuity income using the “normal expenditure from income” exemption. Mr Webb said provided that the rules are followed, the gifts can immediately be exempt from IHT. If a joint life annuity is bought, then it carries on after the death of the first person and is IHT free for the second life, even if they aren’t married or in a civil partnership.
With whole of life policies savers can use income to pay for regular premiums for a policy which pays out a guaranteed lump sum when the saver dies. The payouts are free of IHT, provided the policy is set up under trust, Mr Webb explained.