Question 1

What is a nominees' annuity?

Accepted Answer

An annuity payable to a nominee of a pension member. The law gives it two routes: bought together with a lifetime annuity payable to the member, where the member becomes entitled to that annuity on or after 6 April 2015; or bought after the member's death, where the member died on or after 3 December 2014. This guide is about the first route, because that is the one excluded from inheritance tax. In everyday terms it is a joint life annuity where the second life is a child, grandchild or anyone else the member chooses, rather than a spouse or civil partner.

Question 2

Who can be a nominee?

Accepted Answer

An individual who has been nominated, by the member or by the scheme administrator, and who is not a dependant under the pension tax rules. A member's child under 23 is a dependant. A child aged 23 or over can be a nominee even if the member supports them financially, unless they are dependent because of physical or mental impairment or an older scheme's rules keep them as a dependant. For people other than the member's children, financial dependence on the member, mutual financial dependence, or dependence because of impairment can make them a dependant rather than a nominee. A spouse or civil partner is a dependant, not a nominee. A nominee need not be related to the member. A scheme administrator's nomination only counts while there is no dependant and no individual or charity nominated by the member for the relevant benefits.

Question 3

What is the difference between one bought in the member's lifetime and one bought after death?

Accepted Answer

Only the lifetime version is excluded from inheritance tax. A nominees' annuity bought in the member's lifetime, together with the member's own lifetime annuity, is an excluded benefit under section 150A(6)(c) of the Inheritance Tax Act 1984 for a death on or after 6 April 2027. A nominees' annuity bought after the member's death, with unused funds, is a different route and is not in that list. Age at death matters to the income tax position of both, but the conditions differ: for an after-death purchase using unused uncrystallised funds, tax-free treatment also requires the nominee to become entitled within two years of the day the scheme administrator first knew, or could reasonably have been expected to know, of the death.

Question 4

Does it have to be one joint life contract?

Accepted Answer

No. The law says the nominees' annuity must be purchased together with the member's lifetime annuity, and that means related to it. HMRC's manual explains that as the same contract, written on a joint life basis, or a separate contract with the same insurer or another one, bought within 7 days before or after the member's own annuity. A separate contract bought outside that window is not the lifetime-purchased related annuity discussed here.

Question 5

Is a nominees' annuity excluded from inheritance tax from 6 April 2027?

Accepted Answer

Yes, if it was purchased together with a lifetime annuity payable to the member. Section 150A of the Inheritance Tax Act 1984, inserted by the Finance Act 2026 for deaths on or after 6 April 2027, brings most unused pension money into the estate. Subsection (6)(c) lists a dependants' annuity or a nominees' annuity purchased together with a lifetime annuity payable to the member as an excluded benefit, and HMRC's technical note confirms there is no requirement for the other party to be a dependant of the member.

Question 6

Why is it bought with no guarantee period and no value protection?

Accepted Answer

Because those extras count for inheritance tax, even though the nominee's annuity itself does not. The exclusion covers the annuity that carries on to the nominee. A guarantee period that keeps paying after death is brought into scope by HMRC's note as a continuing payment, and value protection that returns unused capital as a lump sum is not among the excluded benefits, so each would need its own assessment, after any exemptions and allowances. Having neither is not a condition of the exclusion; it is the choice made in the quotations in the video, so that nothing was left in scope.

Question 7

Is the nominee's income taxable?

Accepted Answer

It depends on the member's age at death. If the member dies at 75 or over, the income is taxed as pension income in the nominee's hands. If the member dies under 75, and the annuity was bought together with the member's own annuity with no payment before 6 April 2015, the income is free of income tax. In the video example Mr Miggins is already 75, so Amy's income is taxable.

Question 8

Can the nominee get the income tax back through salary sacrifice?

Accepted Answer

Possibly some of it. An employed nominee can give up salary in exchange for employer pension contributions, which lowers the income that is taxed, so in effect the parent's pension income replaces the salary and the salary goes into the nominee's own pension. The annuity itself stays taxable, and any saving depends on the nominee's earnings, their pension allowances and their employer. From 6 April 2029, salary-sacrificed pension contributions above £2,000 a year are scheduled to attract National Insurance; income tax relief on pension contributions is unchanged by that measure.

Question 9

What does a nominees' annuity pay? The real quotations

Accepted Answer

On 11 August 2026 Just quoted £29,153.64 a year, £2,429.47 a month, a rate of 5.83%, on a £500,000 fund for a father of 75 and a daughter of 45: level, no guarantee, no value protection, paid monthly in arrears, with 100% continuing to the daughter for life. On 10 August 2026 Canada Life quoted £28,925.76 a year, 5.79%, on the same terms. Both were at standard rates with no adviser charge. These are dated illustrations held on file, not recommendations, and rates may have changed since.

Question 10

What happens when the member dies?

Accepted Answer

If the nominee outlives the member, the agreed income continues to the nominee for the rest of the nominee's life. In the quoted example the continuation is 100% of the gross income. The lifetime-purchased related annuity is kept out of the member's notional pension property by the statutory exclusion in section 150A(6)(c), not simply because the insurer pays the nominee directly. Executors may still need to consider whether the purchase involved a lifetime transfer that has to be reported.

Question 11

What happens if the nominee dies first, or both die early?

Accepted Answer

The annuity ends when the last surviving named life dies. If the nominee dies before the member, the member's income continues for his lifetime and then stops. If both die early, with no guarantee period and no value protection, nothing more is paid. That is a risk of the contract illustrated here, not a condition of the tax exclusion. One way to protect against it is life assurance on the nominee's own life, in trust: term cover protects only for its term, premiums must be kept up, and total premiums can exceed the payout. Whether that is worth doing depends on the family's circumstances.

Question 12

Can a widow buy a nominees' annuity with the pension she inherited?

Accepted Answer

No. The excluded version must be purchased together with a lifetime annuity payable to the member, and she was not the member; her husband was. The opportunity to arrange it ended when he died. She can still buy an annuity on her own life with what she inherited, and she can buy a nominees' annuity with her own pension, because she is the member of that.

Question 13

Can a member set up nominees' annuities for more than one child?

Accepted Answer

Yes. Nothing in the pension rules limits a member to one nominee. A member with two children can buy two nominees' annuities, one for each child, each with its own slice of the fund, bought in his lifetime alongside his own annuity. The insurers take one second life per contract, and in August 2026 wanted each nominee to be 40 or over, so each one is quoted separately. Each purchase raises the same unsettled gift question answered below.

Question 14

Why do insurers want the nominee to be 40 or over?

Accepted Answer

That is the insurers' own condition, not the law. In August 2026 the two insurers who quoted both drew their line at age 40. In law the nominee can be any age, although a member's own child under 23 is a dependant, not a nominee. The other insurers asked at the time said no, though some were reviewing. Steve's expectation in August 2026 was that the age condition would not move before April 2027; that is his forecast, and the market may have changed since.

Question 15

Can a nominees' annuity bring an estate back under the £2 million taper?

Accepted Answer

On the arithmetic, yes, leaving aside the unsettled gift question below. Steve's example from July 2026: a widower of 69 with a £1 million pension and a £2.5 million estate including it, everything to his son, aged 39. Die on 7 April 2027 and the pension counts, the estate is £500,000 over the £2 million taper threshold, the residence nil rate bands fall from £350,000 to £100,000, and the bill is £700,000. Use the whole £1 million to buy his own lifetime annuity with a nominees' annuity for his son, purchased together, and the estate falls to £1.5 million, the residence bands are fully restored, and the bill on the same death is £200,000. The son would get an income for life, tax free if his father died before 75. The example assumes the full transferred bands are available and claimed, that a home of enough value passes to the son, and that nothing else, such as other gifts, reliefs or death benefits, disturbs the sums; the annuity rate was an estimate. It is an illustration, not an available quotation: the son was 39, and the insurers quoting in August 2026 wanted the nominee to be 40 or over.

Question 16

Is buying a nominees' annuity a lifetime gift for inheritance tax?

Accepted Answer

Nobody has settled it, and this guide does not settle it. What follows is Steve's analysis, not HMRC's published position. His reading: buying the continuation for another person out of a pension may be a transfer of value, because it can leave the member's estate smaller, and if the conditions for a potentially exempt transfer are met it may be a PET. The exclusion at death in section 150A does not answer that lifetime question. On his reading, before 6 April 2027 the answer may be yes, and after 6 April 2027 it turns on whether what the member holds over the pension is a right or a general power, explained in the next question. HMRC's technical note says the 2027 changes do not alter the existing position for lifetime transfers, but that passage is about money taken out of a pension and then given away; it does not expressly decide this purchase. HMRC's manual says lifetime charges from changes to pension rights generally arise only where the member was in ill health. Pension lifetime transfers have reached the Supreme Court, in HMRC v Parry in 2020, but that case concerned a different transaction and does not decide this one. The full argument is in Osborne's Get Out of Jail Card Under Attack.

Question 17

Why does it matter whether a pension is a right or a power?

Accepted Answer

Because the Act counts them differently, and this is the heart of Steve's analysis. Your estate is the property you are beneficially entitled to (section 5(1)). Section 5(2) adds property you do not own but have a general power to dispose of as you think fit, except settled property, meaning property in a trust; a general power is a specific test, and not every power, request or nomination over a pension meets it. Section 151(4) says that for pension schemes the words 'other than settled property' are treated as omitted, so until 6 April 2027 a pension trust over which the member holds a general power counts as his, and giving part of it away can be a gift. From 6 April 2027 the Finance Act 2026 omits section 151(4) and replaces section 151(3) with a rule that sections 49 to 53 do not apply to pension property. After that, on Steve's reading, a settlement power over the fund no longer counts, because section 272 says property does not include a settlement power; but a right to benefits is property, counts under section 5(1), and would count before and after April 2027. Rights and powers can exist side by side, and which a member holds depends on the scheme and the contract. Other pension and family legislation generally describes a member's lifetime position as rights, which is why Steve thinks a right is the more likely answer, though words elsewhere do not settle the tax question. Even if the pension counts, a gift still needs a loss to the estate and the PET conditions to be met. This is his reading of the words, not a ruling, and no court has decided this particular question.

Question 18

If it is a gift, how big would it be?

Accepted Answer

The statutory starting point is the loss to the member's estate on the day. This guide does not establish an accepted valuation for this purchase, and what follows is Steve's illustrative income-ratio calculation, not an actuarial valuation or an HMRC-approved method. In round numbers: a pot that would buy a single life annuity of £10,000 a year buys £5,000 a year instead so that 100% continues to his son, so he has given up half the income, and half of a £100,000 pot is £50,000. On real quotations run on 19 September 2026, a pot of £99,368.63 bought £10,000 a year single life or £6,084.36 a year with a 45-year-old second life, a drop of 39.16% (39.1564% unrounded), which applied to the pot gives £38,909.18, and £15,563.67 of tax at 40% if death came within three years with no allowances left. HMRC's actuaries would value a real case on age and health, and the figure could be larger or smaller.

Question 19

If it is a gift, when does the seven-year clock start, and what happens on death within seven years?

Accepted Answer

If the purchase is a potentially exempt transfer, the clock starts on the day the annuity is bought. A PET made seven years or more before death is exempt; any other becomes chargeable. A chargeable gift uses up the nil rate band before the estate does, so a gift within the band reduces what is left for the estate, and a gift above it may itself bear tax. Where the gift itself is taxed, taper relief reduces the tax if the gift was made more than three years before death: 80% of the full rate at three to four years, down to 20% at six to seven years. Taper reduces the tax, not the size of the gift.

Question 20

Where would it be reported after death?

Accepted Answer

On both pension and gift forms, which work together. Form IHT409, pensions, asks whether the deceased transferred, nominated, assigned or changed pension benefits in the two years before death. HMRC's notes to the main form say that if you want to include your own value for pension benefits given away, you enter it on form IHT403, gifts and other transfers of value, and explain how you arrived at it. So if the purchase were a gift, its value would sit on IHT403 with the explanation on IHT409. That is one reason the point is easy to miss.

Question 21

Is there a two-year rule?

Accepted Answer

Not a rule that settles it, and not a safe harbour. HMRC's manual says that where a transfer of pension rights was made more than two years before death, HMRC can generally assume the member was in normal health unless there is evidence otherwise, and that lifetime charges from changes to pension rights generally involve a loss to the estate only where the member was in ill health at the time. Form IHT409 asks about changes to pension benefits in the two years before death. That is HMRC's enquiry practice, not a statutory exemption after two years, and it is a different two-year period from the one that affects the income tax position of an annuity bought after death. Buying a nominees' annuity in good health, well before death, is a different thing from a change made on a deathbed.

Question 22

How can the seven-year risk be covered?

Accepted Answer

For the possible failed-gift liability discussed here, the relevant cover is on the member's life. A policy held in a suitable trust can provide money to the trustees outside the member's estate following a covered death, subject to the conditions below. Cover for a fixed term and whole of life cover last for different periods: term cover ends when the term ends, while whole of life pays whenever death occurs, including after the seven years when a PET would no longer fail. So whole of life would pay in the seven-year window and beyond it; its payout is not confined to a failed gift. The tax position has its own conditions. An annuity and a life policy on the same life can be treated as associated operations under sections 263 and 268 of the Inheritance Tax Act 1984; HMRC's Statement of Practice E4 treats them as not associated where the policy was issued on full medical evidence, at minimum a private medical attendant's report used in normal underwriting, and would have been issued on the same terms if the annuity had not been bought. Premiums are only exempt as normal expenditure out of income if all three conditions in section 21 are met: part of the person's normal expenditure, made out of income taking one year with another, and leaving enough income to keep their usual standard of living; and section 21 has a special rule where an annuity has been bought on the same life. Whether cover suits a family, the amount, the exclusions and keeping up the premiums all need separate consideration. Whole of life assurance has its own page on this site.

Question 23

Does a nominees' annuity lose value with inflation, and can it be undone?

Accepted Answer

A level annuity pays the same amount for life, so its buying power falls with inflation; escalating versions start lower. Once the cancellation period has passed, an annuity purchase normally cannot be reversed, so the decision is for the member's life and the nominee's life after that. The quotations above were all level.

Question 24

How does it compare with leaving the pension fund to the child?

Accepted Answer

From 6 April 2027 an unused fund left at death counts in the estate. After the exemptions and allowances available, the exposure is 40%, with a marginal effect of 60% on the slice that tapers away the residence nil rate band, plus income tax on withdrawals if death is at 75 or over. The site's worked example on the pensions page, with all its assumptions, shows a £500,000 fund costing a family £516,000 in extra inheritance tax and income tax combined, across the family, not deducted from the pension itself. A nominees' annuity bought in the member's lifetime with his own annuity is excluded, so that inheritance tax does not arise on it, and the nominee pays income tax on the income only if the member died at 75 or over. The price is that the capital becomes an income for two lives, with no lump sum, and in the example no guarantee, no value protection and no inflation protection. The unsettled gift question sits on top.

Question 25

Where did the nominees' annuity come from?

Accepted Answer

From George Osborne. In March 2014 he said no one would have to buy an annuity, and annuity sales fell sharply over the next two years. On 29 September 2014 he announced that anyone dying under 75 could pass an unused pension fund to anybody tax free, but not an annuity. On 3 December 2014 the government levelled that up: annuity income could pass to anyone too, on the same tax-free basis. The Taxation of Pensions Act 2014 added the definition of a nominee to the pension tax rules, and the Finance Act 2015, which received Royal Assent on 26 March 2015, added paragraph 27AA, the nominees' annuity, from 6 April 2015. In Steve's experience nothing then happened for more than a decade: he found no mainstream insurer marketing one, and the first quotations he obtained were in August 2026, from Just and Canada Life. When Parliament wrote the 2027 rules it named the nominees' annuity and excluded it.

The nominees' annuity: every question answered

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