A recent survey undertaken by Legal & General revealed that nearly 50% of millennials admit to having no retirement plan in place. With long life expectancies, increasing costs of living and uncertainty around the future of the state pension, this trend could create significant financial stress for future retirees.
The situation is only expected to get tougher. The UK Government recently announced that people retiring in 2050 are likely to be 8% worse off than pensioners today, sparking a national review being commissioned on how to tackle this issue.
Proposed changes to Inheritance Tax
Adding further pressure are the proposed Inheritance Tax (IHT) changes to pension funds, which could remove one of the key benefits of passing on pension wealth tax-free after death. Under current proposals, most pension funds will remain IHT-free until April 2027. Beyond that, families could face new tax bills on inherited pensions.
Tax benefits that make private pensions worthwhile
Given the ever-increasing life expectancies, with the possibility that the state retirement pension may not be in existence forever, it remains extremely important for individuals to ensure that their retirement plans are adequate.
There are still several compelling tax incentives for saving into a private pension:
- Tax relief on pension contributions - including potential National Insurance savings if using a salary sacrifice scheme.
- Tax-free investment growth - pension funds are not subject to Income Tax or Capital Gains Tax while invested.
- 25% tax-free lump sum - typically available when you start drawing your pension.
- No Income Tax on pension death benefits - if you die before the age of 75, your beneficiaries can withdraw the entire fund tax-free.
- Inheritance Tax exemption (for now) - pension funds are currently outside of your estate for IHT purposes, though this is set to change from April 2027.
While it can be difficult to prioritise pension contributions (especially during a cost of living crisis), even small, consistent contributions can make a meaningful difference over time. Compound growth, tax efficiencies and employer contributions (in workplace schemes) all help build a more secure future.
The next step
At UHY we believe it’s never too early, or too late, to revisit your estate planning and retirement strategy. Whether you are just getting started or reviewing your current pension arrangements, we can help.
For advice on pension planning or future changes to Inheritance Tax, please contact Nick Edwards in our Sittingbourne office or speak to your usual UHY probate adviser.
