UK households told one thing could help outfox HMRC tax bill | Personal Finance | Finance
Unspent retirement funds may be included in taxable estate (Image: Getty)
As rising rates and upcoming inheritance tax changes reshape retirement planning, the annual incomes of wealthy savers in the UK are back in the spotlight.
Once seen as undervalued, annuities are now gaining popularity again as interest rates rise and pension “death duty” reforms threaten to bring more estates within the scope of inheritance tax. Under changes expected from April, unspent pension funds may be included in taxable property; Estimates show approximately 10,500 more properties will be affected and 38,500 will face higher bills.
Some retirees are responding by using annuities to reduce inheritance tax exposure while earning high guaranteed income.
An annuity provides a guaranteed income in exchange for a lump sum payment. Once purchased, the money used to purchase it is separated from your estate, potentially reducing inheritance tax liability.
For example, in a £2 million estate scenario, a £1 million annuity purchase could reduce a £400,000 inheritance tax bill to zero, subject to available allowances such as the nil rate band and the residential nil rate band.
Another advantage is that annuity income can potentially be donated under the “gift of excess income” rules and may fall outside the scope of inheritance tax if the conditions are met.
If retirees die early, they may be exposed to inflation risk and incur losses. (Image: Getty)
Despite their tax appeal, annuities come with trade-offs.
Helen Morrissey of Hargreaves Lansdown said: Telegram: “Once purchased, the annuity cannot be cancelled, so if you make the wrong choice you may regret it. Different providers also offer different annuities, so it’s vital to get quotes from across the market rather than sticking with the first offer you get.”
The expert added that people should consider whether they need to provide for their spouses after their death, as purchasing power will decrease regardless of inflation.
Provider data shows increased interest from older and affluent savers. Standard Life said annual income quotas over £1 million have doubled since 2024, while claims from over-75s have quadrupled, partly driven by tax rule changes.
Income levels will decrease if protection of the surviving spouse is included (Image: Getty)
A 65-year-old spending £1 million on annual income could receive around £77,000 a year over their lifetime, or around £52,000 a year if subject to inflation. Higher payments will be possible if purchased later in life; A 75-year-old could potentially earn close to £98,000 per year.
If protection of the surviving spouse is included, income levels decrease.
Tom Minnikin, of DJH group tax firm Forbes Dawson, said: “When George Osborne introduced new pension freedoms, the annuity was treated as a dead dog. With pensions brought within the scope of inheritance tax, the whole system has been turned upside down again.”
James Baxter, founder of investment management firm Tideway Wealth, argued that “the basic math hasn’t changed.”
His firm’s analysis shows that people need to live past 95 to get a better return than holding gold in a checking account.
“It is better to leave a part of something to your family than to be sure of nothing,” he added.
Annual income rates rebounded sharply, reaching about 7.6% for 65-year-olds in early 2026, from 4.7% in 2020. As a result, demand increased; Pensioners in the UK will spend £7.4bn on annuities in 2025; According to industry data, it is the highest level since 2014.
