Confidence in pensions as a long-term retirement savings vehicle is being eroded by impending changes to inheritance tax (IHT) rules, according to a new survey by Standard Life. The retirement giant's research indicates that 22 percent of adults surveyed reported diminished faith in pensions after learning that unspent pension pots will be subject to death duties starting in spring 2027.
However, a majority of respondents, 49 percent, stated that this change did not alter their view of pensions, which offer benefits such as employer contributions and government tax relief. The remaining respondents were largely uncertain, while a small minority felt more confident about pensions.
Standard Life expressed concern that individuals who overestimate the impact of future inheritance tax liabilities could jeopardize their financial future if this deters them from contributing to pension schemes. Neil Jones, a tax and wealth planning specialist at Standard Life, noted the risk that the upcoming IHT change could undermine confidence in pensions, potentially leading some individuals to consider alternative savings vehicles.
While most individuals may not accumulate enough assets to trigger inheritance tax even with the inclusion of leftover pension funds, the combination of frozen tax thresholds and private sector workplace pension savings is expected to draw more estates into the tax net over time. Currently, approximately 4 to 5 percent of estates pay inheritance tax, a figure projected to rise to 7 percent when pensions are factored in for the next tax year.
Inheritance tax is levied at a 40 percent rate on assets exceeding £325,000 per person, or £500,000 if a home is passed to direct descendants. Couples can combine these thresholds. However, rising property values, frozen tax bands, and the forthcoming inclusion of pension funds have led to an increase in the number of families liable for the tax.
According to Standard Life's survey of 2,000 UK adults, 54 percent of those who expressed reduced confidence cited concerns that their beneficiaries might face higher inheritance tax bills. An additional 38 percent were uncertain about the tax implications, 32 percent found pensions too complex, and 20 percent preferred savings options perceived as more flexible.
Standard Life also clarified that most estates with unused pension funds will likely remain below the inheritance tax thresholds. Furthermore, assets often pass to a surviving spouse or civil partner, who are typically exempt from IHT. Government forecasts suggest that in 2027-28, around 213,000 estates will include unused pension funds, representing nearly one in three deaths in the UK. More than 75 percent of these estates are still expected to transfer pension savings free of inheritance tax, but the remainder will become liable or face increased tax obligations.
The firm cautioned that the number of affected estates is likely to grow over time due to frozen thresholds until 2031 and increasing asset values. This change is expected to be most significant for individuals who intended to pass on pension funds tax-free, rather than those who rely on them for retirement income.
Jones emphasized that pensions remain a cornerstone of retirement planning and one of the most tax-efficient methods for accumulating savings. He highlighted the triple benefit of pensions: tax relief, long-term compound growth, and employer contributions for eligible employees. He advised that moving away from pensions could mean sacrificing a sustainable retirement income to avoid a tax that many might not ultimately pay.