How a £550,000 pension can be structured to reduce inheritance tax

In response to a reader’s query, AJ Bell policy chief Rachel Vahey outlines the UK inheritance-tax framework, noting the £325,000 allowance and the extra £175,000 residence relief that does not apply when leaving assets to a nephew. While most pension assets are currently exempt from estate tax, reforms slated for April will start treating unused defined-contribution funds as part of the estate. Vahey explains that a straightforward annuity, which ceases when the holder dies, generally avoids inclusion, whereas joint life or guaranteed-period annuities could be counted.

She cautions that choosing an annuity solely for tax reasons sacrifices flexibility, and that drawdown remains more adaptable but may become taxable after the reform. Finally, she suggests withdrawing surplus pension cash during life, acknowledging the income-tax cost and potential gift-tax implications.