Pension Annuities and Inheritance Tax
What happens to an annuity when you die?
An annuity can do more than just support your ideal lifestyle. It can also take care of your loved ones after you die, by giving them a single lump sum or ongoing payments.
But Inheritance Tax (IHT) rules are changing in April 2027. Your beneficiaries might have to pay IHT. It’s very important that both you and they understand how that could work.
Does an annuity stop when you die?
Usually, yes – but it doesn’t have to. You can choose a death benefit option, which can give either a lump sum or ongoing payments to a beneficiary. You’ll set that up when you’re buying your annuity.
Depending on your product and provider, you’ll probably be able to choose from some or all of these:
- Annuity guarantee period
This lasts for between one and thirty years, depending on your age and provider. If you die during this time, your provider will pay any remaining benefits to your chosen beneficiary, either as a lump sum or regular payments. This may give you a lower starting income, but it gives your loved ones peace of mind.
- Annuity value protection
This lets you protect a quarter, half, three quarters, or all of the money you spend on your annuity. When you die, your nominated beneficiary will get a lump sum payment of that amount, minus any cash already paid to you. This may give you a lower starting income, but it gives your loved ones peace of mind.
- Joint annuity payments
This means your payments will keep going to a loved one (like a spouse or civil partner) after you die. You can choose how much of your income (for example, half, three quarters or all of it) they get. This usually leads to a lower starting income, because your provider will have to keep paying out for longer.
Understanding the Inheritance Tax changes
Inheritance Tax is very complicated. If you or your beneficiaries think it might apply to your estate, we strongly recommend getting professional advice about it.
This article shares a topline understanding of IHT as it relates to annuities. It’s not intended to be a complete guide to it. More general information can be found in our ‘What is Inheritance Tax?’ article.
Inheritance Tax Changes from April 2027
From April 2027, anyone who benefits from your annuity if you die might have to pay Inheritance Tax (IHT) on any money they get. That applies to any pension funds or other death benefits you have too.
This means that, unless any death benefits go to a spouse, civil partner or charity, they may be subject to a 40% tax. It kicks in if your estate is worth more than £325,000. If you’re passing your main home on to a direct descendant or descendants, the residence nil rate band could add £175,000 to each of their allowances.
Why’s IHT changing?
The Treasury wants to stop people from using pension schemes to transfer wealth rather than support their retirement. The government thinks that the new rules will probably affect around 10,500 estates per year.
Which annuity payments could trigger IHT if you die?
- Any annuity payments not going to your spouse or civil partner
- Any payments from a fixed-term product/annuity
- Any lump sum death benefits not going to your spouse, civil partner or a charity
- Any lump sum payment resulting from an annuity protection option (excluding to spouses or civil partners)
Which annuity payments won’t trigger IHT if you die?
- Any annuity payments going to a spouse, civil partner, or registered charity
- Joint-life annuity payments are not treated as transfers on death and therefore do not give rise to IHT
- Any payments from a single life annuity
How will your beneficiaries make the payment?
- Who reports and pays IHT: Whoever manages your estate (its executor or administrator) has to report and pay any IHT due within six months of your death. If there is any IHT due, your beneficiaries are jointly responsible for it.
- Where the payment comes from: It can come from your estate, from your pension pot (if it’s £1,000 or more) or from your beneficiaries. Or your provider might deduct it from the benefit and pay it directly to HMRC.
- How your pension scheme provider can help: They must pay out any unused pension funds or death benefits within 35 days of hearing about your death. They have to help your executor or administrator pay IHT.
- Which other taxes you might have to pay: If you’re over 75 when you die, income tax might also apply to any annuity payments. If it’s overpaid, your beneficiaries will have to reclaim it from HMRC.
- The income‑tax treatment of annuity income for beneficiaries depends on the age at death:
- If death occurs before age 75, any spouse, civil partner or other beneficiary receiving income under a joint‑life or guaranteed‑period annuity will receive that income tax‑free.
- If death occurs after age 75, any annuity income paid to beneficiaries will be taxable at their marginal rate.
How to plan for IHT
- Review your estate plan: Bear the new IHT rules in mind when you’re setting up your annuity and planning your will.
- Consider the IHT impact of your annuity choices: Joint life annuities and death benefits paid to spouses or civil partners are exempt from IHT.
- Explore and understand your options: Read our other articles on annuities and use our annuity calculator to model different annuity choices.
- Get professional advice: IHT is complex. You can get personalised guidance from our own retirement advice service or an independent financial adviser.
- Stay Informed: IHT regulations may evolve, so keep up to date with updates and government announcements.
Frequently asked questions
No. Benefits paid to a spouse, civil partner, or charity are exempt. Joint life annuities are also out of scope for IHT.
Age of death makes no different to IHT. But beneficiaries may also have to pay income tax if you die aged 75+. They can claim any overpayments back from HMRC.
This article is based on the latest government updates and L&G’s internal regulatory guidance as of January 2026. Regulations may change. Always consult the latest information and ideally seek professional advice before making any financial and in particular IHT-related decisions.
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