Do you have to pay Inheritance Tax on the remaining balance of a guaranteed annuity?
05 June 2025
Question by Gerard
If someone buys an annuity with a 10-year guarantee and dies after, say, 5 years, is the remaining balance subject to Inheritance Tax?
Answered by Boring Money
Hi Gerard,
If someone in the UK dies before the end of their guaranteed annuity term, the remaining payments should continue, usually to a nominated beneficiary. How those payments are taxed depends largely on how old the person was when they died. However, the rules are changing, and the generous tax treatment we’ve come to expect won’t last forever.
As things stand now, if the annuitant dies before age 75, the remaining guaranteed payments can usually be passed on completely tax-free. That means no Income Tax and no Inheritance Tax (IHT) for the beneficiary, provided the payments are made within two years of the provider being notified of the death. It’s one of the few big pension tax perks still on the table.
If the annuitant dies after age 75, the situation shifts slightly. While the remaining guaranteed payments are still exempt from IHT under current rules, the beneficiary will have to pay Income Tax at their own marginal rate - 20%, 40%, or even 45%, depending on their total income.
Seems straightforward. But from April 2027, the UK government plans to bring pensions into the scope of estate valuation for IHT purposes. While we don’t yet have all the fine details, the key point is that pension death benefits, including annuities with guaranteed periods, will be included in the value of the deceased's estate.
That means if someone dies with a remaining guaranteed income stream from their annuity, the value of that stream could count towards the estate’s IHT liability from 2027 onward. This is on top of the fact the actual annuity income could also be liable for Income Tax for the beneficiary if the deceased was over 75.
It’s a double whammy: Income Tax for the beneficiary and potentially Inheritance Tax for the estate too.
So under current rules, the remaining balance on an annuity is tax-free if the annuitant dies before age 75, and income-taxed if they die after 75. But no IHT either way, until April 2027, when new rules may start dragging those benefits into the IHT net.
It’s worth keeping an eye on this space and possibly seeking the help of a good tax adviser. You can read more about financial advice in our Advice Hub or reach out to one of our financial adviser Contributors for more assistance.
Hope you find this helpful!
