Trust in pensions is being impacted by the upcoming change to inheritance tax rules for a fifth of people, a new survey suggests, even as the majority will not have to pay IHT. 

The changing bringing unused pension pots into IHT from April 2027 means while about half (49%) of adults say their confidence in pensions remains unchanged, 22% say this has reduced since the new rules were announced, according to a survey by Standard Life. 

Standard Life found that passing on a higher IHT burden tops concerns for people with lower pension confidence, followed by uncertainty on the new rules and complexities around pensions more generally.  

“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. The research is a timely reminder for the new prime minister that even seemingly technical changes to pensions and savings rules can seep into the public consciousness and influence behaviour. Pensions are a long-term investment, often built over decades, so people need confidence that the rules supporting retirement saving will remain stable," said Neil Jones, tax and wealth planning specialist at Standard Life.

“Moving away from pensions could mean sacrificing a sustainable retirement income to avoid a tax people may never pay," Jones added.

He stressed that pensions will remain a very tax-advantaged way to save for retirement after the change, thanks to tax relief, employer contributions and compound interest.

"Those considering alternatives should carefully weigh up any long-term impact before making decisions," he said.

An employee in their mid-20s earning £25,000 and contributing at the auto-enrolment minimum could see £5,014 less in today’s money at retirement age if they pause pension contributions for just one year, and nearly £25,000 less if opting out for five years.

IHT receipts are expected to go up from currently £8.7bn to £14.5bn in 2030-31, as the nil-rate band remains frozen until April 2031, adding further to tax take.

While more estates will pay the 40% tax, it will still be a minority. It is projected that about 213,000 estates, about one in three deaths, will include unused pensions, but that more than three-quarters of these will still fall below the IHT threshold, which consists of a £325,000 allowance and a £175,000 residence allowance. Passing assets to a spouse is tax-free, and the unused allowance of a predeceased spouse can be added once assets are passed to others, bringing it up to £1m where a home is involved.