Upcoming changes to inheritance tax, which will see unused pension funds included in the value of estates, is having a knock-on effect on people’s confidence in pensions, says Standard Life.
From 6 April 2027, most unused defined contribution pension funds and death benefits will be included in a person’s estate for IHT purposes. Forecasts suggest that in 2027/28, around 213,000 estates will include unused pension funds, representing almost one in three deaths in the UK, with 49,000 estates set to pay IHT for the first time or face a higher IHT bill.
Standard Life said the changes have prompted more than a fifth (22%) of people to have less confidence in pensions, while 49% said their confidence levels remain unchanged.
The retirement specialist said the changes come amid a “perfect storm” for IHT, with frozen thresholds and rising asset values at play. Over time, the number of people affected is likely to rise as a combination of the two gradually drags more estates into the IHT net.
However, Standard Life warned the change is most significant for those who had planned to preserve pension assets for IHT purposes, rather than draw on them to provide retirement income.
Neil Jones, tax and wealth planning specialist at Standard Life, said: “There is a real risk that the upcoming IHT change could undermine confidence in pensions, with some people considering alternatives for their long-term savings.
“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. Pensions are a long-term investment, often built over decades, so people need confidence that the rules supporting retirement saving will remain stable.
“Moving away from pensions could mean sacrificing a sustainable retirement income to avoid a tax people may never pay.”
Standard Life said those thinking about pension changes should consider the future impact on retirement income. Its own analysis shows that an employee in their mid-20s earning £25,000 could lose out on £5,014 in today’s money terms at retirement age from pausing pension contributions for just one year. Pausing for five years could mean losing out on £24,715.
Jones added: “Pensions are central to retirement planning and one of the most tax efficient ways to build retirement savings. This won’t change post April 2027. They carry the triple benefit of pensions tax relief, long-term gains from compound interest, and employer contributions for eligible employees. Those considering alternatives should carefully weigh up any long-term impact before making decisions.”
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