How to reduce my pension inheritance tax bill before April 2027

There is no single solution that works for everyone — the right approach depends on your age, your income needs, your estate size, and your family circumstances. But there are several well-established options that a good financial adviser can model for your specific situation.

Here is a plain-English explanation of each.

Option What it does Best for
1. Draw down & gift Take funds out and gift them Basic-rate taxpayers with other income
2. Gifting & exemptions Use annual and income exemptions Those with income above spending
3. Life insurance in trust Pays the IHT bill, outside your estate Clear liability, affordable cover
4. Expression of wishes Ensures pension reaches the right people Everyone – free, do it now
5. Spousal contributions Shift funds to a lower-valued estate Couples with pension disparity
6. Annuity conversion Removes IHT on that portion entirely Over-70s with modest income needs
1

Draw down and spend, save, or gift

The simplest way to reduce IHT exposure on your pension is to take money out of it. Once funds leave the pension wrapper they’re subject to income tax at your marginal rate, but no longer part of the pot that faces IHT. The net benefit depends on your tax rate, what you do with the funds, and how long you live.

Worked example: Margaret withdraws £50,000 as a basic-rate taxpayer. She pays £10,000 income tax, leaving £40,000. If she gifts it to her children it falls outside her estate after 7 years – paying 20% now to avoid a future 40%.

✓ Best for: basic-rate taxpayers with income from other sources
2

Gifting and using exemptions

You can give away money during your lifetime to reduce your estate. The annual allowance is £3,000/year (immediately outside your estate, carryable one year). Normal expenditure from income – regular gifts from surplus income that don’t affect your standard of living – is immediately exempt regardless of size. Larger gifts fall outside your estate after 7 years, with the rate tapering from year 3.

✓ Best for: those with income exceeding expenditure
3

Life insurance in trust

Rather than reducing the IHT bill, this pays it. A whole-of-life policy written in trust pays a lump sum on death. Because it’s in trust, the payout sits outside your estate – your beneficiaries use it to settle the IHT bill without selling assets or waiting for probate.

Worked example: Peter has a £120,000 IHT liability. He takes a £120,000 whole-of-life policy in trust. His children receive the payout free of IHT and use it to settle the bill – the estate passes to them intact.

Cost: A healthy 65-year-old non-smoker might pay £200 – £400/month for £100,000 of cover. Premiums rise with age – another reason to act before April 2027. The policy must be written in trust to work; a policy not in trust adds to your estate instead.

✓ Best for: a clear liability, with affordable cover
5

Spousal pension contributions

If you’re married and your spouse has a lower pension pot, contributing to theirs can shift funds into a lower-valued estate. But the 2027 change means both pensions eventually face the same rules on the second death, so this is more complex than it first appears and is best modelled by an adviser.

✓ Best for: couples with significant pension disparity
6

Annuity conversion for part of the pot

Converting some of your pension to an annuity removes the IHT exposure on that portion entirely – an annuity pays income during your lifetime and ceases on death (or after a guaranteed period), so there’s no pot left to include in your estate. The trade-off is losing drawdown flexibility and the ability to pass funds on.

✓ Best for: over-70s with large pots and modest income needs
✅

Do this one regardless – it’s free and takes 30 minutes

Whatever else you decide, check your expression of wishes is up to date. This form tells your pension provider who should receive your pot when you die. It doesn’t reduce your IHT – but without a current form your pension can be paid to the wrong person, or into your estate rather than directly to a beneficiary. Contact your pension provider directly. Everyone with a pension should do this today.

Which option is right for you?

The best approach depends on your age, estate, income needs and family. A regulated adviser can model each option for your situation – we’ll connect you for a free initial conversation, no obligation.

Connect me with a regulated adviser
In some cases, yes – particularly if you draw down and gift the funds, or arrange your estate to fall below the threshold. In others you can significantly reduce the impact. The right approach depends on your individual circumstances, which a regulated adviser can model for you.
The deadline is 6 April 2027. But some strategies – like life insurance in trust – take time to arrange and become more expensive the older you are when you apply. Some gifting strategies need 7 years to be fully effective. The sooner you take advice, the more options are open.
It depends on your tax rate, income needs, and what you do with the funds once drawn. For basic-rate taxpayers who can afford to give the money away it can be highly effective. For higher-rate taxpayers, the income tax on drawdown can reduce the benefit. An adviser can run the numbers for your situation.
Life insurance in trust is one of several options, not the only one. If premiums are prohibitive – usually due to age or health – other strategies including gifting, drawdown, or estate restructuring may achieve a better result. Don’t rule out planning because one option seems unaffordable.

IMPORTANT DISCLAIMER: Nothing on this page constitutes financial advice. The options described are general information only. Your individual circumstances will determine which, if any, of these approaches are suitable for you. We strongly recommend speaking to a regulated independent financial adviser before making any changes to your pension or estate planning.