Pensions, inheritance tax, and your employees

What employers really need to know

The bottom line? For most employees, the upcoming changes which will see pensions included in the estate for Inheritance tax (IHT) from April 2027, is likely to have little impact. Most people use their pension savings to support their retirement, so any potential IHT impact is likely to be minimal—if it’s even relevant at all. You can confidently reassure your employees that pensions are still an excellent benefit and a valuable way to save for the future.

Pensions are still a smart choice

Despite some recent headlines, pensions remain one of the best ways for employees to save for their future. With tax relief, employer contributions, and the potential for investment growth, pensions are a smart way for your employees to secure their financial future. The IHT changes haven’t taken that away.

Employees should take time to plan

It’s completely understandable if employees are worried by the news, but it’s important they don’t make snap decisions, like cutting back on pension contributions, based on misunderstandings.

The government estimates that out of roughly 213,000 estates with pension wealth in 2027-28, around 10,500 will be impacted by IHT where they wouldn’t have before, and another 38,500 will pay more than they would under the current system.

If any of your  employees are worried about IHT, you can support them by encouraging them to seek professional advice and make informed, long-term financial decisions. 

Who’s most likely to be affected?

The obvious group who could be affected are those who already have assets subject to IHT – which is those with an estate worth at least £325,000. Let’s talk about those who could be impacted from April 2027. IHT might affect someone who dies very early in retirement, before they’ve started taking much money from their pension savings. However, people draw down their pension savings bit by bit, and only a very small percentage will die with a large untouched amount of money soon after retiring.

Importantly, anything passed to a surviving spouse or civil partner remains completely free of IHT, but there will be significant changes for co-habiting couples, as unused pensions passing between them will be subject to IHT.

Any lump sum death-in-service benefits are not included in the plan to make pensions subject to IHT which is good news. And pension funds left directly to registered charities will also be IHT-free.

While it’s been widely reported that pensions will become subject to IHT from April 2027, it’s important to keep these changes in perspective. At present, many people don’t have a level of assets that would result in an IHT charge on their death, and even after the changes in April 2027, still won’t exceed the IHT threshold.

Most people live for many years after they begin drawing pension benefits. The greater risk is running out of defined contributions pension funds during their lifetime, rather than the IHT charge on remaining pension funds at their death. Stopping or reducing contributions funding due to IHT concerns is unlikely to be in most people’s best interest.

Ways to support your employees

If your employees are worried about IHT you can support them by: 

• Sharing this article with them - Changes to inheritance tax (IHT) on pensions from 2027.
• Encouraging them to check their pension savings and to see if they’re on track for the retirement income they’ll need, before making any changes.
• Suggesting regular reviews of pension and estate plans, not just when tax news breaks.   
• Reminding them to get professional financial advice if they are likely to be subject to IHT – tax and pensions are complicated!

Key takeaway for employers

We believe pensions are still a fantastic, tax-efficient benefit for employees. The recent IHT changes won’t impact most people—especially those steadily drawing down their pension savings in retirement. As an employer, you’re right to keep supporting pensions as a core part of your benefit offering.

If you or your employees don’t have a financial adviser there are a number of directories to help find an adviser in your area.