Retirement and IHT Planning: Investment Bonds

With proposed changes to the inheritance tax treatment of pensions from April 2027, retirement and estate planning is becoming an increasingly important topic.

What are they?
Investment bonds are medium to long-term investments structured as life assurance policies. They are made up of individual policy segments and can offer flexibility around withdrawals, tax planning and estate planning.

There are two main types:

• Onshore bonds: issued by UK insurers. The fund is taxed within the UK, which can make them simpler for basic rate taxpayers, however, higher rate and additional rate taxpayers may still face a further tax liability when gains are realised.

• Offshore bonds: issued by providers outside the UK. They can allow tax on investment growth to be deferred until withdrawals are taken, or the bond is fully encashed. This can be particularly useful where income is expected to reduce in retirement, or where withdrawals can be planned for a lower tax period.

In both cases, the aim is not simply to avoid tax, but to control when tax is assessed and align withdrawals within the wider financial plan.

What can they do?
Investment bonds are typically divided into individual policy segments, which can be surrendered separately to provide capital when required or, in certain circumstances, assigned as a gift to another individual.

Professional advice should always be sought before taking action.

A key feature is the ability to withdraw up to 5% of the original investment each policy year for a maximum of 20 years, without an immediate income tax charge. Alternatively, the 5% deferred withdrawal can be rolled up if it is not taken in a specific year. This is tax deferred, not tax free, so it is important to receive professional advice.

Why does this matter now?
Historically, many people left defined contribution pensions untouched as they could often be passed on outside their estate for inheritance tax. Once unused pension funds are brought into estates from April 2027, a review of which assets are drawn on, which are gifted, and which are held for beneficiaries is essential.

Investment bonds could form part of that conversation. Used appropriately, they can support retirement income, simplify trust administration and help families plan how wealth is passed on.

As ever, suitability will depend on individual circumstances, tax status, investment objectives, income requirements, and estate planning goals. Independent financial advice should be obtained before making any decisions.

The above information is for educational purposes and is not a personal recommendation or investment advice. Content is accurate at the time of writing. Tax limits may change in future. Capital at risk. Wise Investment is authorised and regulated by the Financial Conduct Authority (FCA 230553).