Confidence in pensions as a retirement savings vehicle is being undermined by upcoming changes to inheritance tax (IHT) rules, according to a survey by retirement giant Standard Life. The changes, set to take effect in spring 2027, will make unspent pension pots liable for death duties.

The survey of 2,000 adults found that 22 percent of respondents have less faith in pensions after learning about the impending IHT changes. Another 49 percent stated that the information did not alter their view of pensions, which offer benefits such as employer contributions and government tax relief. The remaining respondents were largely unsure, with a small minority expressing increased confidence.

Standard Life expressed concern that individuals overestimating the impact of future inheritance tax bills could negatively affect their financial planning if it deters them from saving into a pension. Neil Jones, tax and wealth planning specialist at Standard Life, noted, "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."

Inheritance Tax Thresholds and Impact

While most people's total assets may not reach the threshold for inheritance tax even after pension funds are included, frozen tax thresholds combined with consistent private sector workplace pension savings are expected to draw more estates into paying the tax over time. Currently, approximately 4 to 5 percent of estates pay inheritance tax, a figure projected to rise to 7 percent in the next tax year once pensions are factored in.

Inheritance tax is levied at a 40 percent rate on assets exceeding £325,000 per person, or £500,000 for those leaving a home to direct descendants. These thresholds can be doubled for couples, as spouses are exempt from IHT. However, escalating property values, frozen thresholds, and the inclusion of pensions are contributing to more families becoming subject to the tax.

Standard Life's analysis indicates that by 2027-28, an estimated 213,000 estates will include unused pension funds, representing nearly one-third of deaths in the UK. The company projects that over three-quarters of these estates will still pass on pension savings free of inheritance tax. However, the remainder will become liable for the tax for the first time or face a higher tax burden.

Public Perceptions and Retirement Planning

Among the 22 percent who reported decreased confidence in pensions, 54 percent cited concerns that beneficiaries might face higher inheritance tax bills. Other reasons included uncertainty about tax implications (38 percent), pensions feeling too complex (32 percent), and a preference for more flexible savings options (20 percent).

Standard Life emphasized that most estates with unused pension funds will likely fall below the inheritance tax thresholds or pass to a surviving spouse or civil partner who is typically exempt. The firm cautioned that individuals who planned to pass on pensions tax-free, rather than using them for retirement income, will be most affected by the upcoming changes.

Jones added that pensions remain a cornerstone of retirement planning and one of the most tax-efficient methods for building savings. He highlighted the enduring benefits of pension tax relief, compound interest, and employer contributions, stating that these advantages will not change after April 2027. He warned that shifting away from pensions could lead to sacrificing a sustainable retirement income to avoid a tax that many individuals may ultimately not have to pay.