Estate practitioner clients withdrawing from pensions ahead of IHT changes

Clients are withdrawing money from their pensions earlier or faster than planned due to the forthcoming changes to inheritance tax (IHT), according to members of the Society of Trust and Estate Practitioners (STEP).

In a survey of its members, STEP found that 81 per cent had seen clients change their estate or pension planning in response to the government’s plans to bring most unused pension funds and death benefits into the scope of IHT from April.

The most common change, which was reported by 83 per cent of practitioners, was clients taking money from their pensions earlier or fast than planned, including the tax-free lump sum.

More than three quarters (77 per cent) had observed clients increasing lifetime gifting, 66 per cent had seen will or trust revision, while 50 per cent had clients that changed who benefits from their pensions.

Almost all (93 per cent) said clients were concerned about the upcoming changes to IHT in relation to pensions.

Overall, 97 per cent of respondents believed the changes would make estate planning more complex for clients, including 83 per cent who felt the new rules would make it significantly more complex.

Six in 10 were seeing clients putting less money into their pensions and looking to alternatives, while 21 per cent said clients were raising concerns over people being more reluctant to take on the role of executor or personal representative.

Over a third (34 per cent) of practitioners noted that clients were worried about the impact of the reforms on executors and personal representatives who will be responsible for reporting and paying IHT on pensions.

When asked about the top three concerns being raised by clients, the potential IHT bill on pension funds was the most common, cited by 86 per cent of practitioners, followed by increased legal and tax costs (51 per cent), and decisions about pension withdrawals (46 per cent).

Over two fifths (41 per cent) had seen clients buying an annuity or life insurance to cover an expected IHT charge.

“These findings come from practitioners who are advising clients about their wider estate planning, not just IHT on pensions in isolation,” said STEP technical counsel and head of government affairs, Emily Deane.

“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.”

STEP urged the government to make amendments to the IHT/pensions legislation, highlighting issues such as families having to pay tax before probate is granted, but not being able to access funds until probate has been obtained.

“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,” Deane continued.

“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.”

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