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Keeping pension funds invested has long been a smart move for tax efficiency—but from April 2027, new IHT rules mean this strategy comes at a price. So, could life cover offer a solution?
In April 2015, the 55% “death tax” on Defined Contribution (DC) pensions was scrapped and the beneficiary drawdown was introduced, turning DC pensions into a multi-generational tax-efficient wrapper. The government now plans to close that route.
From 6 April 2027, most unused DC pension funds and pension death benefits will be included in your estate for inheritance tax purposes regardless of your age at death. This signals a major shift in direction for investors who have, up until now, used their pension as a valuable estate-planning tool.
In fact, the Office for Budget Responsibility (OBR) suggests this will mean 10,500 estates will be newly paying IHT in 2027-28.
But just because the Government wants to align pensions with how other assets are taxed on death, doesn’t mean you can’t take steps to tackle the impact.
Life insurance: More than just a tax solution
If you’ve skimmed the headlines lately, you’ll know life insurance – especially whole of life cover – is having a moment since the 2024 Autumn Budget. However, whilst this has been spurred on by Rachel Reeves’ efforts to balance fiscal rules and spending pledges – careful protection planning brings more benefits than just paying a tax bill.
Whole-of-life cover written in trust
A whole of life policy guarantees a lump sum when you die.
So, by placing this policy in trust, the payout sits outside your estate and goes directly to your chosen beneficiaries or trustees.
Why it works:
- The money is available exactly when the inheritance tax bill falls due (providing premiums are maintained).
- Funds reach your family quickly, without waiting for probate (which avoids lengthy delays).
- It gives your estate breathing room, so your loved ones aren’t under pressure to make immediate decisions, like selling the family home or other assets.
In practice, this approach provides certainty: the tax bill is met, your family keeps control of the assets you intended them to inherit, and it delivers a simple process at a difficult time.
It’s worth noting here that another announcement that grabbed just as many headlines was that the 100% Agricultural Property Relief / Business Property Relief will be capped at £1m from April 2026. With any value above receiving 50% relief (effective 20% IHT). Those affected by tis change should also be looking towards protection planning with renewed focus.
The disadvantages of whole of life cover
Of course, it’s important to note the downsides here, as well as the upsides.
Whole of life cover can be expensive, especially for older applicants, and it doesn’t reduce the IHT bill, it only pays it.
And with an ever-changing tax landscape, this means the IHT liability you calculate today might be higher by the time the policy pays out, meaning regular reviews will be required to keep sums assured aligned with IHT exposure.
Fixed Term protection planning
An alternative is term assurance that provides cover for a set number of years, paying out a lump sum if you pass away during that time. It doesn’t have an end date, like whole of life cover, but term assurance can be a cost-effective way to help with IHT planning.
For example:
- You might use a fixed-term policy to cover a known liability, such as a gift that could create a tax liability if you die within seven years.
- It can provide peace of mind during that period, knowing funds are in place for your family if needed.
- Premiums are generally lower than whole of life cover, making it more affordable where the need is temporary.
In short, term protection gives your family reassurance during the years when tax risks are higher, without committing to the lifetime costs of a whole of life plan.
What to start doing in 2025/26
1) Establish your exposure
Project your potential estate value across scenarios including pension, business and agricultural assets from 2027. Include the tapering of the residence nil rate band for estates worth over £2,000,000.
2) Decide how to tackle it
Everyone’s circumstances are different with no one size fits all solution. If your plan is “leave it for the family”, consider pairing that strategy with a whole of life policy in trust. Price up the cost; remembering that age and health could create high premiums that make the policy too expensive.
You can always spend more and give more while you’re still alive:
- Use the seven‑year gifting rule. Gifts above annual allowances are exempt from IHT providing you survive seven years.
- Enjoy your wealth. Try to strike a balance between living comfortably and preserving capital for heirs.
- Gift surplus income. Regular gifts from income that do not reduce your standard of living are immediately exempt from IHT.
- If accelerating spending from pensions you should carefully compare the cost of protection against your income tax rates and those of your heirs.
3) Implement cleanly
Write any life policies in appropriate trusts and keep nominations/expressions of wish up to date across all schemes.
For many families, the appeal of leaving pensions untouched meant leaving options on the table. Their wealth was left to grow in a tax-advantaged wrapper and could then pass flexibly across generations.
The 2027 IHT change doesn’t necessarily end that strategy, but it does put a price on it.
Protection is the tool that buys back optionality, giving you:
- Liquidity from day one to meet IHT without forced asset sales.
- Control over who receives what, and when.
- Simplicity for executors dealing with new reporting obligations and timelines.
If you’ve accumulated significant pension, business or agriculture wealth with an eye on intergenerational planning, then now is the time to measure the likely IHT impact and review next steps. Done well, life cover in trust not only pays a tax bill but simultaneously can preserve investment strategy, cut administration at death, and keep control with your family.
This article is a general overview and not advice. Tax treatment depends on your circumstances and may change. Please seek personalised advice before taking action.
Get in touch
To speak to an Amber River financial planner, call 0800 915 0000, or set up an initial appointment by visiting amberriver.com/contact
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