Your pension could soon pay you for life. Here’s how it could still help your kids.

If you’ve ever worried about your pension pot running out before you do, the government thinks it has the answer. Pensions Minister Torsten Bell has announced plans called Guided Retirement, and they could change how millions of people turn their savings into an income.

But there’s a catch that’s got a lot of people talking: if your pension is paying you for life, what’s left for the family? I think the answer is more interesting than the headlines suggest.

What’s being proposed

Right now, most people saving into a workplace pension reach retirement with a pot of money and a big decision: what on earth do I do with it? Under the new plans, your pension scheme would have to offer you a ready-made default, a pension that pays an income for the rest of your life. Around 17 million private sector workers could get this option.

Two things worth knowing straight away. It’s a default, not a compulsion, so you’d have the right to opt out. And it’s not happening tomorrow. A consultation runs until 22 December, and schemes are expected to offer the default by 2030.

Why now?

Because of how people are actually using their pensions. Nearly half of people accessing their pension for the first time take the whole lot out, and half of working-age adults have no retirement plan at all. Pension freedoms, introduced in 2015, gave people choice, but choice isn’t much use if you don’t know what to choose.

Is the income actually guaranteed?

Not always, and I’d urge a bit of caution here. Schemes could provide the income in stages, for example keeping your money invested and drawing from it flexibly in your 60s, then switching to a fixed income for life later on. One option is a new type of collective scheme, which pools lots of people’s money to share the risk and aims for rises in line with inflation. “Aims for” is the important phrase. Unlike an annuity, where an insurer guarantees your income for life, these schemes target an income rather than promise it.

The inheritance question

Here’s what most of the coverage has focused on. When your pot is turned into an income for life, it’s used up paying you. That’s the point. So there’s less, or nothing, left to pass on.

For years, pensions have been one of the best ways to leave money to family. That’s already changing. From April 2027, unused pension pots will count as part of your estate for inheritance tax. In some cases, pension money could face 40% inheritance tax, and then your family pays income tax on what’s left.
So the “leave my pension to the kids” plan was already looking a lot less attractive before this announcement.

The rule that changes the picture

This is where it gets interesting. There’s a little-known inheritance tax rule called “gifts out of normal expenditure”, or more simply, gifts from surplus income. If you have more income than you need to live on, you can give the extra away regularly, and those gifts can be free of inheritance tax straight away. Unlike most gifts, there’s no need to survive seven years, and there’s no upper limit.

Pension income counts. So if you were planning to leave your pension untouched for your children, there’s another way to look at it. Take an income, live on what you need, and pass on the surplus while you’re alive. Your family gets the money now, when it’s probably more useful to them, and you get to see the difference it makes.

To qualify, the gifts need to:

• come from income, not from savings or capital
• be regular, forming a pattern, such as monthly or yearly
• leave you with enough to keep your usual standard of living

Records really matter here. The exemption isn’t claimed until after you die, and your executors will need to show HMRC, year by year, what you earned, what you spent and what you gave away. A simple log of your income, spending and gifts kept alongside your will makes their job much easier.

A few honest caveats. Pension income is taxed before you give it away, so this isn’t a free lunch. It works best for people who genuinely have more coming in than going out, typically those with other income or savings to live on. And it doesn’t help people who are asset rich but income poor, for example someone with a modest pension and a valuable home.

What this means if you’re already retired

As I read it, Guided Retirement is aimed at people approaching retirement, not those who have already sorted out their income. If you’re already drawing your pension, the new default doesn’t affect you. But the gifting rule might, and it’s worth looking at now, especially with the April 2027 changes on the way.
If you’re tempted to make sudden moves because of those changes, be careful. Taking tax-free cash early purely to dodge inheritance tax is unlikely to make sense, and leaving it in a bank account could even increase your exposure.

The debate has been framed as security or inheritance: pick one. I don’t think it’s that simple. For people with more income than they need, an income for life and helping your family aren’t opposites. The bigger question might be whether you’d rather your children inherit after you’ve gone, or receive help while you’re here to share it.

I’d love to know where you stand. Comment below and tell me.

Please note: This article is for educational purposes only and isn’t personal financial advice. The proposals are under consultation and could change, and inheritance tax rules depend on your individual circumstances. For guidance on your options, the government’s free Pension Wise service is available to anyone aged 50 or over, or you can speak to a regulated financial adviser.