Inheritance tax changes are eroding confidence in pensions, according to a survey by retirement giant Standard Life. The company warned that the new rules, which will make unspent pension funds liable for death duties from spring 2027, are making some people doubt the value of saving for old age.
Confidence in pensions as a way to save for retirement is being undermined by the impending inheritance tax raid, the survey suggests. Some 22 per cent of adults said they had less faith in pensions once they learned that unspent pots will become liable for death duties. However, 49 per cent of people said this didn’t change their view of pensions, which come with perks such as free employer contributions and government tax relief.
The rest were mostly unsure, while a minority felt more confident about pensions, according to the Standard Life survey on the ‘ripple effect’ of the new rules. The company is worried people who overestimate the impact of a future inheritance tax bill could harm their financial prospects if this deters them from saving into a pension.
Tax worries: One in five are more dubious about using pensions to save for the long term due to inheritance tax changes coming up.
Most people will not have enough assets to qualify for inheritance tax even when leftover pension funds start being taken into account, but over time frozen thresholds combined with private sector workplace pension saving will drag many more into the net.
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Around 4 to 5 per cent of estates currently pay inheritance tax, and this is expected to rise to 7 per cent once pensions are included in the next tax year. IHT is levied at 40 per cent on assets worth more than £325,000 per person, or £500,000 if you leave a home to direct descendants. Couples can double those thresholds, because spouses are exempt from IHT.
However, rising property prices, frozen thresholds and the future inclusion of pensions have meant growing numbers of families are getting caught by the tax. Industry body Pensions UK’s benchmark report puts the cost of a comfortable retirement at £45,400 for an individual, which would require a £532,000 pension pot for someone retiring at age 65, according to calculations for This is Money by wealth manager Evelyn Partners.
The arrival of Andy Burnham as Prime Minister has led to speculation about a further overhaul to pay for social care reforms, which could hit more estates. Standard Life explained the upcoming inheritance tax change to 2,000 adults, weighted to be representative of the UK population, before asking if this would change their attitude towards using pensions to save for the long term.
It questioned the one in five who said they would have less confidence in pensions about their reasons, and 54 per cent said they were worried their beneficiaries might face higher inheritance tax bills. Some 38 per cent were unsure about the tax implications, 32 per cent said pensions felt too complex, and 20 per cent preferred more flexible savings options.
Most estates with unused pension funds will fall below the inheritance tax thresholds, or assets will pass to a surviving spouse or civil partner who are typically exempt from IHT, according to Standard Life. It cites government forecasts suggesting that in 2027-28 around 213,000 estates will include unused pension funds, representing almost one in three deaths in the UK.
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More than three-quarters of these estates are still expected to pass on pension savings free from inheritance tax, but the rest will become liable for the first time or will pay more than before. Standard Life says over time the number affected is likely to rise as thresholds – which are frozen until 2031 – and growing asset values gradually drag more estates into paying the tax.
But it adds the change will be most significant for people who planned to preserve pensions to pass on free of inheritance tax, rather than those who draw on them to provide retirement income. Mr Jones said: ‘The research is a timely reminder for the new Prime Minister that even seemingly technical changes to pensions and savings rules can seep into the public consciousness and influence behaviour.’
Moving away from pensions could mean sacrificing a sustainable retirement income to avoid a tax people may never pay. Jones adds that pensions are central to retirement planning and one of the most tax efficient ways to build savings, which won’t change after April 2027. He says they carry the triple benefit of pensions tax relief, long-term gains from compound interest, and employer contributions for eligible employees.
Consider professional financial advice on pensions and inheritance tax. An adviser will look at all your options and build a tailored financial plan for you.
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If you need help with broader retirement planning or inheritance tax, then seeking financial advice is wise. You can find a local adviser in your area with Unbiased, the platform that matches you with financial professionals based on your needs.
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