Finance Act 2026 · Royal Assent 20 March 2026

The Flexible Pension Annuity — How Both Taxes Are Eliminated

From April 2027, pension funds will face both Inheritance Tax and income tax simultaneously. For many clients, this creates a combined charge of up to 67% — a double tax that did not previously exist.

For clients already over 75, this is a live planning issue today, not a future risk. The income tax charge on death benefits has applied since 2015. IHT is new from April 2027.

There is a structured, FCA-regulated solution that eliminates both taxes — the income tax charge from the day of transfer, and IHT after two years.

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— days
to April 2027
Finance Act 2026 takes effect 6 April 2027
BPR qualifying period is 2 years · Act now to start the clock
£500,000 pension · client over 75 · no spousal exemption
IHT @ 40%−£200,000
Beneficiary income tax @ 45%−£135,000
Net to children£165,000
33p in every pound reaches the next generation
With the FPA · after 2 years
IHT — 100% BPR£0
Income tax via Pref Share£0
Net to children£472,700
Finance Act 2026 · Royal Assent 20 March 2026.  April 2027 is now less than 12 months away. For clients over 75, income tax on death benefits can be eliminated from the day of transfer. The 2-year BPR clock starts immediately.
⚠ For professional adviser use only — not for client distribution. The information on this site does not constitute financial, tax or legal advice. Tax treatment depends on individual circumstances and is subject to change. BPR is not guaranteed — past claim success does not guarantee future outcomes. The value of pension investments can go down as well as up. Independent advice required before any recommendation is made to a client.  Full risk warning ↓
The Flexible Pension Annuity

The Solution — How the FPA Works

The FPA is a unit-linked pension annuity. It behaves exactly like pension drawdown — investment-linked, fully flexible income, PAYE taxation. The difference is a Preference Share in a Gibraltar Protected Cell Company that eliminates both taxes on death. Income tax from day one. IHT after 2 years.

Why this works for clients over 75 — right now

For a client over 75, the income tax charge on pension death benefits has existed since 2015. IHT on pension funds is new from April 2027. The FPA addresses both — and uniquely, it eliminates income tax from the very day of transfer, without any qualifying period.

The mechanism: when the annuity ends on death, the fund does not pass as a pension death benefit (which is subject to income tax). Instead, it passes via the Preference Share — a separate legal instrument — so it is treated as a capital transfer, not a pension payment. No income tax. No CGT. From day one.

How the IHT elimination follows

The Preference Share is a small, unlisted share in a Gibraltar-based life assurance company. Once it has been held for two years, it qualifies for 100% Business Property Relief (BPR) under s105(1)(bb) IHTA 1984 — because it meets all four statutory conditions for BPR on shares in an unquoted life assurance company.

Over 250 HMRC death claims have passed the 2-year mark. Not one BPR claim has been refused. This is not a novel argument — it is a tested, working mechanism with a 20-year track record.

The Two-Stage Tax Elimination
Stage 1 — Effective Immediately
1
Client transfers their crystallised pension fund. Assets invested in a legally ring-fenced Protected Cell — held in their name alone, segregated by statute from all other clients and the company itself.
2
Client purchases a Preference Share (typically £300–£1,200, one-off) in the Protected Cell Company. They become, in effect, their own insurer — with the rights to the residual Cell value on death.
3
On death: the annuity ceases. The residual Cell passes to the Preference Shareholder — free of income tax and CGT. An immediate saving of ~45% of the pension fund from day one.
Stage 2 — After the 2-Year Holding Period
4
The Preference Share is an unlisted share in a profit-making insurance company carrying on a life assurance business — satisfying all four conditions under s105(1)(bb) IHTA 1984. Confirmed by Threesixty Services LLP.
5
100% Business Property Relief applies on the first £2.5m (from April 2026). 50% on the excess. The unused £2.5m BPR allowance is transferable to a surviving spouse or civil partner.
6
Result: zero income tax + zero IHT. Over 250 HMRC claims past the 2-year mark. Not one refused. BPR failsafe: even if BPR failed, income tax elimination still applies.
Product Characteristics

What the FPA Is

FeatureDetail
StructureUnit-linked lifetime annuity — single life basis
IncomeUp to 90% drawdown. Start, pause, increase, reduce or full lump sum at any time
Tax on incomePAYE — identical to pension drawdown
InvestmentsStandard funds, equities, bonds, cash. Discretionary managers permitted
In-specie transfersExisting pension assets can transfer without liquidation
Roll-upTax-free within the Cell — same as pension or ISA
PlatformOrigo — a secure system used by pension providers to transfer pensions and share information electronically. The FPA is on Origo, making transfers straightforward and paperless from all major pension providers and SIPPs.
Minimum£100,000 (primary target £500,000+)
Charges2% establishment fee (capped £10,000) · 1% AMC (capped £1,600 pa) · Pref Share £300–£1,200
Additional Planning

What the FPA Also Enables

Normal Expenditure Out of Income

Surplus FPA income (above normal living costs) gifted regularly qualifies for immediate IHT exemption — no 7-year wait. An ongoing, compounding IHT reduction lever alongside the BPR.

Conditional Will Planning

"To my children if BPR applies; to my spouse if not." The income tax benefit applies regardless. The conditional provision maximises the IHT position based on the outcome at death.

Life Assurance Funding

FPA income can fund whole-of-life or term assurance written in trust. A complementary layer, particularly useful during the 2-year BPR window.

Suitability

Who Should Consider This?

✓ Suitable for individuals who:
  • Are aged 75 or over today with pension funds of £500,000 or more, and are reviewing how those funds will pass to the next generation
  • Are concerned that pension death benefits could become exposed to both inheritance tax and income tax, and want to act ahead of April 2027
  • Intend for pension wealth to pass to children or non-spouse beneficiaries, rather than relying solely on spousal exemption
  • Would benefit from immediate income tax efficiency for beneficiaries, particularly where withdrawals are likely post-75
  • Have blended family arrangements and want greater control and certainty over how benefits are distributed
  • Are increasingly aware of potential executor liability under the new rules and want to reduce complexity for their family
  • Want to retain access to flexible income while aligning their pension with a clear estate planning strategy
  • Are under 75 and recognise the value of starting the Business Relief qualifying period early, whether or not action is taken immediately
✗ Not suitable for individuals who:
  • Have pension funds below £500,000, particularly where the planning impact is unlikely to justify the structure
  • Wish to gift or transfer capital during their lifetime rather than plan through pension or estate structures
  • Have no intention of drawing income, as the structure is designed around flexible lifetime income
  • Require guaranteed income, as this is an investment-linked approach and not a fixed annuity
  • Need access to non-standard, illiquid, or highly specialised investments
  • Do not currently have an inheritance tax or estate planning objective, or see this as a priority
  • Are fully covered by spousal exemption with no requirement to consider wider succession planning

For professional adviser use only. Aetas Wealth / Insight Financial Associates Ltd, FCA No. 458421. All figures illustrative. Individual advice required. Contact: peter.rose@aetas-wealth.com

Structure & Mechanics

How It Works — The Full Picture

The FPA's mechanism rests on two structural elements: a Gibraltar Protected Cell Company (legally ring-fencing each client's assets) and a Preference Share (giving the client rights to their own residual fund on death). Together these eliminate both taxes.

From Transfer to Legacy

The 5-Stage Journey

From pension fund to protected legacy

1
Client FundCrystallised pension fund after TFC taken
2
FPA PurchaseTransfer via Origo. Preference Share purchased.
3
Protected CellAssets ring-fenced. Invested in standard funds or DIM mandate.
4
Flexible IncomeClient draws PAYE income. Pause or flex at will. Tax-free roll-up otherwise.
5
On DeathAnnuity ceases. Residual Cell → Pref Share → beneficiaries. No income tax. BPR after 2 yrs.
What Is a PCC?

The Protected Cell Company

  • A PCC is a single legal entity with multiple legally separate cells. Assets in one cell are statutorily ring-fenced — they cannot be used to meet liabilities of any other cell or the company itself.
  • Gibraltar was the first EU territory to adopt PCC legislation (Protected Cell Companies Act 2001). This structure has been tested for over two decades.
  • The UK has no PCC legislation — which is why the structure is Gibraltar-based. Gibraltar is a UK Overseas Territory with close regulatory ties to both HMRC and the FCA.
  • ~20% of UK motor insurance is written by similar PCC structures — Admiral Insurance being the best-known example. This is not experimental.
  • UK-EU agreement confirmed British sovereignty over Gibraltar in June 2025. Draft Treaty Agreement formalised March 2026 — long-term regulatory certainty.
BPR Legal Basis

Why BPR Applies

Confirmed by Threesixty Services LLP (Luke Tribe, Research Manager). All four conditions under s105(1)(bb) IHTA 1984 are met:

1. Shares not listed on a recognised exchange✓ Preference Share is unquoted
2. Company has all characteristics of a body corporate✓ Gibraltar law confirmed
3. Carries on life assurance business for profit✓ Commercial basis
4. Held for 2+ years prior to death✓ Once qualifying period met
BPR failsafe: Even if BPR failed (0 failures to date out of 250+ claims), the income tax elimination still applies. Clients can plan conditionally: "To children if BPR; to spouse if not."
Provider Credentials

Regulatory & Structural Credentials

CredentialDetail
Established2001 — over two decades of continuous operation
FCA RegulationFCA-authorised insurer. The FPA is a regulated unit-linked specialist annuity.
Gibraltar FSCDual-regulated by the Gibraltar Financial Services Commission
FSCS100% policyholder protection, no cap — 'protected contracts of insurance'
OrigoOrigo is a secure system used by pension providers to transfer pensions electronically. The FPA is on Origo — in-specie transfers permitted.
Financial soundnessOwn funds significantly exceed the Solvency Capital Requirement. Audited by an independent firm.
BPR track record250+ HMRC claims past the 2-year mark. Not one refused. Confirmed by Threesixty Services LLP.
Independent tax adviceAvailable from Fusion Partners (~£1,500 + VAT for standard cases)

For professional adviser use only. Prepared by Aetas Wealth / Insight Financial Associates Ltd, FCA No. 458421.

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