Inheritance Tax Changes Erode Pension Confidence, Standard Life Warns
Confidence in pensions as a retirement savings vehicle is being undermined by upcoming inheritance tax changes, new research suggests, as savers reconsider their long-term financial strategies.
A survey by Standard Life found that 22 per cent of adults reported diminished faith in pensions once informed that unspent pension pots will become liable for death duties from spring 2027. However, nearly half of respondents—49 per cent—said the change did not alter their view of pensions, which continue to offer benefits including employer contributions and government tax relief.
The remainder were largely uncertain about the impact, though a small minority expressed increased confidence in pension savings despite the tax changes.
Growing Concerns Over Tax Implications
Neil Jones, tax and wealth planning specialist at Standard Life, cautioned that the impending inheritance tax shift could deter people from pension saving.
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 firm expressed concern that savers who overestimate the impact of future inheritance tax bills might damage their financial prospects by avoiding pension contributions.
Currently, around 4 to 5 per cent of estates pay inheritance tax. This figure is projected to climb to 7 per cent once pensions are included in calculations from the next tax year.
Who Will Be Affected
Inheritance tax is levied at 40 per cent on assets exceeding £325,000 per person, or £500,000 when a home is left to direct descendants. Married couples and civil partners can effectively double these thresholds, as transfers between spouses are exempt from the tax.
Despite the changes, most estates containing unused pension funds will remain below inheritance tax thresholds, or assets will pass to surviving spouses who are typically exempt. Government forecasts indicate that in 2027-28, approximately 213,000 estates will include unused pension funds—nearly one in three UK deaths.
More than three-quarters of these estates are expected to pass on pension savings free from inheritance tax. However, the remainder will face death duties for the first time or pay higher amounts than previously.
Long-Term Impact Expected
Standard Life noted that the number of affected estates will likely increase over time. Frozen thresholds—which remain unchanged until 2031—combined with rising property values and growing pension assets will gradually pull more families into the tax net.
The change will prove most significant for individuals who planned to preserve pensions specifically to pass wealth on tax-free, rather than those who draw on retirement funds for income.
Why People Are Losing Confidence
Standard Life surveyed 2,000 UK adults about their attitudes following an explanation of the inheritance tax changes. Among the one in five who reported reduced confidence, 54 per cent cited worries about higher inheritance tax bills for beneficiaries.
Other concerns included:
- Uncertainty about tax implications (38 per cent)
- Pension complexity (32 per cent)
- A preference for more flexible savings options (20 per cent)
Pensions Remain Tax-Efficient
Despite the concerns, Jones emphasized that pensions remain central to retirement planning and among the most tax-efficient savings vehicles available.
Moving away from pensions could mean sacrificing a sustainable retirement income to avoid a tax people may never pay.
Pensions continue to offer three key benefits: tax relief on contributions, long-term compound interest growth, and employer contributions for eligible workers—advantages that will persist beyond April 2027.
Industry body Pensions UK benchmarks a comfortable retirement income at £45,400 annually for an individual, requiring a pension pot of approximately £532,000 for someone retiring at age 65, according to calculations by wealth manager Evelyn Partners.
Political Uncertainty
The arrival of Prime Minister Andy Burnham has triggered speculation about further inheritance tax reforms to fund social care changes, potentially affecting even more estates in future.
Rising property prices, frozen tax thresholds, and the inclusion of pensions have already meant growing numbers of families are caught by inheritance tax rules, with the percentage expected to continue climbing in coming years.