What do you get when you put nearly 2,000 financial advisers in a (virtual) room and ask them about pensions and inheritance tax?
The answer, based on a recent M&G webinar, is a flood of smart, pressing questions that reveal where the profession’s collective head is at.
With policy shifts on the horizon and clients increasingly focused on intergenerational planning, the webinar uncovered the top 10 IHT-and-pensions dilemmas keeping advisers on their toes.
Here’s what’s being asked and what you need to know:
1. Should advisers plan now on the basis that pensions will be included in the IHT estate?
Yes. Planning should begin now, particularly around how centralised retirement processes will take on a greater intergenerational role. Whether to make specific recommendations will be a firm-by-firm decision. The draft legislation is fairly clear in scope, and policy rarely changes at this stage.
The issue with regular gifting is that, by definition, much of it is in the future — and the rules could change
Advisers should act where clients hold tax-free pension cash and are likely to die post-75. This is not directly tied to the IHT changes, but the income tax disadvantage after age 75 will reduce net legacies and should already have been part of planning.
2. Could the government remove the “normal expenditure out of income” exemption if it becomes too popular?
It’s possible. Qualification for the exemption is unclear, with grey areas such as whether drawdown income counts as income or capital. Rising use of the exemption may prompt further guidance or reform.
The Office for Tax Simplification has previously suggested changes to gifting, and future Budgets could introduce lifetime gifting limits or shift taxation to recipients. The issue with regular gifting is that, by definition, much of it is in the future — and the rules could change.
3. Do gifts have to be monthly to qualify under the normal expenditure exemption?
No. HMRC guidance confirms “normal” does not mean “monthly”. Annual, quarterly or irregular gifts can qualify if they form a pattern and do not reduce the donor’s standard of living.
Claire Trott: Planning through the fog of pension reform
4. Are whole-of-life premiums in trust always exempt under the normal expenditure rule?
Not automatically. Exemption depends on surplus income and meeting all conditions. Premiums may be exempt if the annual exemption or normal expenditure exemption applies; potentially exempt if the trust is absolute; or chargeable if the trust is discretionary. Each case must be assessed individually.
5. What happens if a donor loses capacity and cannot authorise premium payments?
Attorneys’ powers to make gifts are tightly restricted (except in Scotland) and must be in the donor’s best interests. Funding a life policy in trust is a gift, so continuing payments may require Court of Protection permission.
It is advisable to state in attorney documents a preference for continuing premiums, which may make approval more likely. If there are competing financial needs, the policy may have to lapse, so this risk must be considered when using whole-of-life cover for IHT planning.
6. Is annuitisation a transfer of value for IHT?
Yes. Buying an annuity reduces the estate, so it counts as a transfer of value. Joint-life annuities are generally out of scope as no transfer occurs on death of the first annuitant. However, if purchased in ill health, there could be IHT implications.
The “two-year rule” is a reporting requirement, not an exemption — HMRC could still charge IHT if death occurs within seven years.
Discretion remains a powerful tool, especially if wills or nominations are outdated
7. Are bypass trusts still relevant under the new rules?
Yes. They continue to offer control over fund distribution and can mitigate IHT and income tax exposure. While complex, their underlying benefits remain the same — the tax flows are what has changed.
8. Can pension benefits be left to non-earning grandchildren to use their personal allowances?
Yes, subject to scheme rules and correct structuring. This can be income tax-efficient if grandchildren are basic-rate or non-taxpayers, though it brings no IHT advantage.
9. Will expressions of wish become redundant after 2027?
No. Distribution arrangements remain unchanged — the only change is tax treatment. Expressions of wish are still crucial to guide trustees’ discretion. Discretion remains a powerful tool, especially if wills or nominations are outdated.
10. Are QROPS and unauthorised payments in scope under the new rules?
Yes. Both are within the draft legislation. Unauthorised payments will attract IHT, and QROPS are treated like UK pensions for estate valuation purposes.
Les Cameron is head of technical at M&G
