Concerns about the forthcoming inheritance tax changes to pensions are driving clients to change their financial plans, research from STEP shows.
A recent pulse survey by the professional body for trust and estate practitioners found that 81% of practitioners surveyed have seen clients amend their strategies because of the government’s plans to bring most unused pension funds and death benefits into scope for inheritance tax in April 2027.
A frequent change, reported by 83% of practitioners, is clients taking pension money out earlier or faster than planned, including the tax-free lump sum, while 77% of practitioners have seen clients increase lifetime gifting. They are also seeing clients revise their wills or trusts (66%) and change who benefits from pensions (50%). Some are seeing clients marry or enter a civil partnership (29%).
Overall, 93% of practitioners said clients are concerned about the forthcoming inheritance tax changes affecting pensions and 97% of practitioners surveyed said the changes will make estate planning more complex for clients.
STEP has previously warned that IHT on pensions will deter people from saving into pensions while family and acquaintances will become increasingly reluctant to take on the executor role, which it says now seems to be the case. The survey shows 60% of practitioners are seeing clients putting less into pensions and looking at alternatives, such as ISAs, and 21% of practitioners said clients are concerned people are becoming more reluctant to take on the role of executor or personal representative.
Emily Deane, technical counsel and head of government affairs at STEP, said: “These findings come from practitioners who are advising clients about their wider estate planning, not just IHT on pensions in isolation. This underlines the vital importance of specialist advice so that people can make informed decisions about their long-term plans, including future care costs.
“Without professional advice, the risks of getting it wrong are high and costly. People are potentially jeopardising their later life needs if they withdraw pension funds early, for example, without taking proper advice, or fully understanding the longer-term implications.”
Robin Melley, STEP member and MD of Matrix Capital, added: “Far too many people do not take professional advice and turn to the internet or a friend at the golf club or down the pub. This will inevitably lead to many people making unwise decisions that lead to poor outcomes for themselves and their families.
“I am seeing wider evidence of this, including people with accumulated funds making unwise kneejerk decisions to ‘avoid their pension funds being subject to IHT’, which could damage their long-term plans for retirement and later life. As a financial planner and STEP member, I advise clients to make provision for the possibility of later life care, particularly bearing in mind rising rates of dementia.”
Melley warned there is already evidence of businesses seeking to exploit the anxiety and fear that the change in IHT rules on pensions has caused.
“We witnessed this with pension freedoms, in that many people were persuaded to drain their pension pots, which resulted in unexpected income tax charges that were not explained to them, and less income for their retirement,” he said. “I have no doubt that the FCA will be busy as the regulator dealing with the fallout to come.’
Deane added that STEP is urging the government to make amendments to the IHT pensions legislation.
“Currently, the changes contain serious practical flaws that risk creating a catch-22, where families must pay tax before probate is granted, but cannot access funds until probate has been obtained. Other practical issues remain unresolved that risk creating difficulties for bereaved families, personal representatives, beneficiaries and pension scheme administrators,” she said.
“We understand that from 6 April 2027, most unused pension funds and pension death benefits will be included in a deceased person’s estate for IHT purposes. Nevertheless, there is still the opportunity to amend the legislation so that it is fairer and provides people with greater clarity and certainty so that they can make the most informed and best decisions for themselves, their families and businesses.”
