Inheritance tax alert: Retirees rush to protect pensions ahead of major changes

Demand for annuities is surging as wealthier retirees look to reduce future inheritance tax bills ahead of sweeping changes to pension rules due to take effect in 2027.

Pension specialists at Standard Life said the proportion of customers aged over 75 purchasing annuities with their pension savings during the first six months of 2026 has more than quadrupled.

The provider also reported that requests for annuities worth more than £1million have doubled over the same period as larger pension savers reassess how best to pass on their wealth.

Although stronger annuity rates, which are often approaching nine per cent for older buyers, have helped revive demand.

Advisers said the biggest driver is the opportunity to use annuity income to make regular gifts that qualify for inheritance tax exemption when treated as surplus income.

Clare Moffat, pensions and tax expert at Royal London, said the exemption allows retirees to pass on unlimited sums to family members, provided the payments meet the surplus income rules.

Financial planners said conversations about using annuities as part of inheritance tax planning have accelerated significantly over the past two years.

Nicholas Nesbitt, financial planning director at Forvis Mazars, estimated interest in the strategy has increased tenfold, driven by both higher interest rates and the approaching changes to pension inheritance tax rules.

From April 2027, unused pension pots will be brought within the scope of inheritance tax, prompting many retirees to reconsider long-standing retirement strategies that encouraged leaving pension savings untouched for as long as possible.

Analysis by Eversheds Sutherland using HMRC data suggests tens of thousands more people are expected to pay inheritance tax each year once the new rules come into force.

Pete Cowell, head of annuities at Standard Life, said retirement planning is increasingly becoming an ongoing process rather than a one-off decision as savers adapt to changing tax rules.

Mr Cowell said many retirees are reassessing how they use their pension wealth as the tax treatment of pensions continues to evolve.

Many people aged over 75 will remember when annuities were the default retirement income option before pension freedoms were introduced more than a decade ago, a change that led to a sharp fall in demand.

However, advisers said the forthcoming inheritance tax changes are encouraging retirees to revisit annuities as one of several options available when planning how to pass on their wealth.

Mr Nesbitt said he expects demand for annuities to continue rising as the April 2027 deadline approaches.

He warned that beneficiaries inheriting pension wealth from someone who dies after the age of 75 could face income tax at their marginal rate and, when combined with inheritance tax, the effective marginal tax rate could exceed 89 per cent in the most extreme cases.

Standard Life's research also found that 39 per cent of financial advisers expect annuities to become more popular because of the planned inheritance tax changes.

The average annuity premium has also continued to increase, rising by 14 per cent year on year from around £91,000 in 2025 to more than £100,000 during the first half of 2026.

It reflects growing demand from retirees seeking greater certainty and improved tax planning opportunities.