Pensions are still likely to deliver strong outcomes for retirement savers despite inheritance tax (IHT) changes, according to Standard Life.
According to Standard Life, from April 2027, most unused pension funds and death benefits will count toward a person’s estate for IHT. While this mainly affects the wealthiest estates, research shows some savers may consider withdrawing funds early or cutting contributions.
The research suggests that tax relief and employer contributions help the fund grow. Standard Life analysis shows that a £20,000 pension could grow to £37,000 for a basic-rate taxpayer or £49,000 for a higher-rate taxpayer over ten years, compared with £30,000 in an ISA, assuming 4 per cent annual growth.
Standard Life also adds that most pensions are not affected by inheritance tax and withdrawals before age 75 are usually tax-free, but after 75, income tax and IHT could apply for large estates.
Standard Life said the findings show that workplace pensions, supported by employer contributions and tax relief, remain an effective way for employees to save for retirement.
Standard Life tax and estate planning specialist Neil Jones says: “Including pensions within the scope of inheritance tax represents one of the most significant changes to estate planning in decades. While the impact will primarily be felt by the wealthiest estates, there is a risk that pensions begin to be viewed less favourably by the wider saving population who are unlikely to be affected.
“Pensions remain one of the most powerful tools for building retirement income, thanks to the combined benefits of tax relief and employer contributions for eligible employees. Diverting savings away from pensions into alternatives could have long-term consequences for people’s financial security later in life.
“For those focused on wealth transfer, estates that may face IHT should remember that the upfront tax relief on pension contributions may offset any additional tax payable under the new rules. Seeking advice from a professional financial adviser remains the best way to navigate estate planning options.”
