Pensions look set for a shake-up amid government proposals to include retirement savings in someone’s estate when calculating inheritance tax.
Under plans currently going through parliament, inheritance tax could be charged on someone’s pension when they die from April 2027.
Experts warn it could change how people access their retirement funds as retirees need to balance saving enough to fund their golden years with leaving an inheritance to their loved ones – all while not lumbering them with a big tax bill.
Eamonn Prendergast, chartered financial adviser at Palantir Financial Planning, said the old rule of “pensions last” has been turned on its head by the proposed 2027 changes, but that doesn’t automatically mean everyone should rush to draw pensions first.
He said: “The right approach depends on your tax rate, the likely tax position of your beneficiaries, and your overall goals.”
So should you be planning to save more for your retirement or should you be spending it?
The importance of pension saving
It may be tempting to raid your pension when you come to retire but it is also important to ensure you have enough money to fund your golden years.
The cost of a comfortable retirement, according to the Pensions and Lifetime Savings Association (PLSA) is £43,900 per year, so that money has to come from somewhere if you are no longer receiving a salary.
Anita Wright, chartered financial planner at Ribble Wealth Management, said: “The fundamentals of pensions remain attractive—tax relief on contributions, employer top-ups, and long-term tax-free growth still provide a strong case for building retirement wealth this way.”
Any saving and spending decisions may depend on your age.
Philly Ponniah, chartered wealth manager at Philly Financial, said: “Pensions have always been seen as one of the most tax-efficient ways to pass on wealth. If and when that changes, savers need to think more strategically.
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“For those close to retirement, it may mean drawing from pensions earlier rather than leaving them untouched as a legacy pot. For younger savers, it doesn’t mean stopping contributions – you still get upfront tax relief and employer top-ups – but it does mean reviewing how pensions fit alongside ISAs and other investments.”
Gifting before inheritance
If you do want to pass on wealth and avoid a large inheritance tax bill for your loved ones, there are ways to give money tax-efficiently through gifting.
You can pass on money or other assets to a loved one or a friend and reduce the value of your estate using a gift.
These include tax-free gifts to children worth up to £5,000 for a wedding or civil partnership or £2,500 for a grandchild or great grandchild.
More valuable assets can also be passed on and there is no inheritance tax to pay as long as you live for seven years after the gift is made.
Alex Chambers, Senior Mortgage Broker at Clifton Private Finance, says more people are choosing to pass money on while they’re still alive.
Chambers said: “This is where living inheritance comes in. By gifting assets or cash while alive, parents can reduce the size of their estate, and potentially avoid such a heavy tax bill.
“The benefits are twofold: parents reduce their inheritance tax exposure, and children receive financial support when they need it most, whether that’s getting on the property ladder, starting a business, or funding education.”
Don’t panic!
Despite high profile press coverage, fewer than five per cent of estates actually pay inheritance tax.
It is only the value of assets above £350,000 that is liable for inheritance tax and there is a £175,000 allowance for your main residence, plus assets can be passed on to a spouse tax-free.
So for the average man in the street, the charge is one problem they don’t need to worry about, said Scott Gallacher, director at Rowley Turton.
He said: “For the vast majority of people saving for retirement, these reforms—whilst unwelcome—shouldn’t change their plans at all. Most already struggle to save enough for a comfortable retirement, so worrying about inheritance tax is an unnecessary distraction.
“The real impact will fall on the wealthiest, or on those who don’t spend enough of their savings in retirement.”
While tax is important, Dr Ramin Nakisa, managing director at PensionCraft warns against letting policy rumours hold you back from saving as much as you can afford, adding: “Focus on what you can control and remember that two of the most important determinants for success in investing are how much you invest and how long you invest for.
“Think carefully before making irreversible choices, like taking your entire tax-free lump sum based on changes that may not last.”
There is also always a chance that the government could change its mind.
Wright added: “No one should assume today’s tax treatment is fixed forever. Future governments could reverse or adjust the legislation, meaning pensions might yet regain their position outside IHT.
“The key point is that pensions should continue to be viewed first and foremost as the cornerstone of retirement funding. Savers should continue to take advantage of their many benefits.”
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
