The UK government’s plan to include unused pension funds in inheritance tax from 2027 is prompting advisers and retirees to explore innovative strategies, notably the revival of ‘back-to-back’ arrangements, amid concerns over fairness and complexity.
The government’s move to bring unused pension funds into the inheritance tax net from 6 April 2027 is already prompting sharp debate among advisers, but it is also creating fresh planning opportunities for some affluent retirees. According to Greg Neall, a chartered financial planner at Wake Up Your Wealth, one of the more striking examples is the revival of “back-to-back” arrangements, a structure more commonly associated with earlier decades of pension planning.
The idea is straightforward, if highly selective. A retiree with spare pension capital, good health and the ability to qualify for whole-of-life cover can use pension income to fund an insurance premium written into trust. Neall argues that, for the right client, the result can be a materially larger inheritance tax-free death benefit than the net income being surrendered. In his example, a 70-year-old man with just over £200,000 in pension funds could buy an annuity paying £16,700 a year for life. After income tax at 40%, that leaves around £10,000 a year, which could then fund a whole-of-life policy delivering a £345,000 payout on an annual premium of £10,000.
That sort of comparison helps explain why the new rules are likely to have uneven effects. The Treasury’s policy paper, first published in July and updated in November, says most unused pension funds and death benefits will be brought into a person’s estate for inheritance tax purposes from 6 April 2027, with personal representatives responsible for reporting and paying any tax due. But the government has also confirmed that some benefits, including death in service payments and dependant’s scheme pensions, remain outside the scope of the charge. Several advisers have warned that the change will force a re-think of estate planning, especially where pension pots were previously expected to pass free of inheritance tax.
Neall’s central criticism is that the reform may hit some families harder than others, while leaving many wealthier households with options that can soften the blow. He says those who die before minimum pension age could face inheritance tax on unused pension savings without ever having had the chance to draw them. He also points to second marriages, where pension wealth may be intended for children from a first relationship, and to the interaction with the residence nil-rate band, which can be tapered as estates rise in value. In his view, healthier people with larger pension pots may be best placed to take advantage of insurance-based planning, while those with health conditions may struggle to obtain suitable cover.
The broader concern among advisers is that the tax change may not deliver the simplicity or fairness the government intends. Crowe UK has described the reforms as a major shift in the treatment of pension wealth, while guidance from specialist financial planning sites has urged savers to review wills, pension nominations and wider estate plans ahead of April 2027. Yet Neall argues the policy could end up benefiting only a narrow group, including some members of defined benefit schemes with large guaranteed incomes, while creating fresh complexity for everyone else. His complaint is not simply that the rules are more onerous, but that they appear to have opened the door to highly engineered workarounds for the well-advised, while exposing less flexible savers to more tax.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
