With pensions set to be included in inheritance tax (IHT) calculations from 2027, conversations around how wealth is structured and ultimately passed on, are beginning to shift. Against this backdrop, the role of income within portfolios is attracting renewed attention, particularly where it can support regular tax-efficient gifting without drawing on core capital. The current market environment is strengthening the case for the contractual interest payments available from fixed income.
Bryn Jones, head of fixed income at Rathbones, says: “After several years of rising interest rates, bond markets are offering income levels not seen for over a decade, while risks are more clearly priced. It is a very different backdrop for bonds than investors have seen for a long time, offering relatively rare opportunities. It’s not often you get a chance to invest in positive real income available across of the credit spectrum.”
Richard Cook, senior financial planner at Rathbones, comments: “The inclusion of pensions within IHT from 2027 is prompting a broader rethink around how assets are used over time. It is clear that one area that is coming into sharper focus is the distinction between capital and income, particularly in the context of passing on wealth.
“Where income exceeds day-to-day requirements, it can create flexibility. Rather than relying solely on capital, a natural and regular income stream can support a more gradual approach to transferring wealth, without it being subject to inheritance tax.
“For income-focused investors, particularly those using ISAs and SIPPs, higher yields materially improve the role bonds can play,” Cook adds. “The ability to generate a consistent income stream without eroding capital is increasingly relevant in the current environment.”
Higher starting yields across UK and global bond markets are a key part of that dynamic. Positive real income can now be harnessed across much of the credit spectrum, something that has been largely absent for much of the past ten years.
Bryn Jones continues: “Beyond income generation, fixed income is also being supported by improved risk-return characteristics. Higher starting yields and shorter duration across bond indices mean risk-adjusted returns are more attractive. In addition, bonds continue to play an important role in diversification and managing volatility, particularly in periods of geopolitical uncertainty or when equity markets are pressured.”
Within tax-efficient wrappers, the treatment of income and capital gains can further enhance outcomes over time.
Richard Cook says: “Sheltering income within ISAs and SIPPs, and allowing it to compound, can be powerful over the long term. As the 2027 changes approach, income is becoming a more prominent part of the overall conversation, not just for portfolio construction, but in how wealth may ultimately be used.”
With the end of the tax year approaching, investors who have not yet used their ISA and SIPP allowances may look to secure current income levels and begin compounding sooner.
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