Leave Your Pension to Your Children? You Still Can

For decades, pensions sat outside inheritance tax. The advice was simple: preserve the pension, spend other assets first, pass pension wealth to the next generation tax-free. Thousands of families planned exactly that way.

From April 2027, unused defined contribution pensions fall inside the inheritance tax framework. Here is what that means for you.

Why This Matters

I am in my 60s. My boomer peers retired with pensions from the golden age of workplace schemes. Final salary. Defined benefit. Generous accrual rates that rewarded decades of loyal service.

Our children will not have the same fortune. There are no 60th accrual final salary schemes waiting for them. The line manager at JLR with a £600,000 pension fund built over a career — that outcome is simply unreachable for millennials, for Gen Z, for most of Gen X.

It is entirely natural to want to share that good fortune. To want to pass on what you have built over a lifetime. And it would be a travesty to see a lifetime of disciplined saving lost to inheritance tax when there are legitimate, well-established ways to prevent exactly that.

The Risk

The third part of this trilogy showed that the combined effect of inheritance tax, the residence nil rate band taper, and income tax on pension drawdown can mean up to 87.2% of a pension fund lost to tax. In some cases, it reaches 90%.

Almost ninety pence of every pound going to HMRC instead of to your children and grandchildren.

That is not a theoretical risk. It is a mathematical certainty for families in a specific set of circumstances — circumstances that are far more common than the press or the government would have you believe.

The Solution

There are four steps. They must be taken in the right order.

1. Set up a whole of life policy now, while you are in good health. Not an over-50s plan from a television advert. A properly underwritten whole of life policy. Your health is your biggest asset in this process. Once it changes, options reduce or disappear entirely.
2. Check your pension nomination — and update it for the April 2027 reality. The default option of “leave everything to my spouse” may turn out to be the most expensive decision you ever make. It needs to be reviewed in the context of both estates, both tax positions, and the new rules.
3. Use your pension to fund the whole of life policy. Purchase an annuity from your pension fund and use the annuity income to pay the premiums on the whole of life policy. This immediately begins to take capital out of your estate. But it only works if the whole of life policy is already in place first.
4. Structure the trusts correctly. This is where most advice falls short.

But This Only Works If You Set Up Two Trusts, Not One

Most advisers who arrange whole of life insurance will write the policy into the insurer’s standard trust. That is normal practice. It is also not enough.

You need a second trust — a lifetime trust. A separate, standalone discretionary or flexible trust that sits alongside the insurer’s trust. We call this the “IHT Pool.”

This is the protected fund. The fund that exists specifically for paying inheritance tax, helping the surviving spouse, and keeping the estate stable when it matters most.

Why Two Trusts?

When the first spouse dies, the whole of life policy pays out. That payout lands in the insurer’s standard trust. The trustees of that trust then immediately pass the proceeds to the family lifetime trust — the IHT Pool.

The money is now outside both estates. It is protected. It is available. And it is there for when the real inheritance tax liability crystallises — on the second death.

This structure buys time. No forced sales. No panic. No fire-sale of the family home or the business to meet a tax bill within six months of death.

It gives control. The terms are agreed in advance. The trustees know what to do. The family knows the plan.

Why This Requires Proper Advice

This is not an over-50s plan. It is not something you arrange online in fifteen minutes.

It requires:

• An underwriting strategy — applying to the right insurer, at the right time, with the right medical evidence
• Premium sustainability — ensuring the annuity income covers the whole of life premiums for life
• Trust structuring — setting up both trusts correctly, with the right powers and the right beneficiaries
• Nomination review — ensuring pension nominations reflect the April 2027 reality, not the pre-2027 assumptions
• Estate analysis — understanding how both estates interact, where the taper bites, and where the liquidity gaps sit

Most advisers can arrange a policy and a standard trust. But the standard approach was not designed for family wealth planning across generations. It was designed for simple cases. Your case is not simple.

If This Describes Your Situation

Your intention to leave your pension to your children can still be achieved. The route has changed, but the destination has not.

Structure matters more than ever. April 2027 is not the end of pension inheritance planning. It is the start of a different kind of planning.

The tools exist. The legislation supports it. But the planning needs to be done properly, and it needs to be done now — while health allows, while time permits, and while the full range of options remains available.