There are always competing demands on our time, so it is only natural that immediate necessities, rather than pension savings locked away for a working lifetime, are given priority.
Add into the mix that pensions are inherently complex and there is another obvious barrier to engagement.
With the demise of defined benefit schemes in the UK private sector, where workers benefit from a guaranteed, inflation protected, lifetime income, the complexity, and risk, has now been passed from the employer to the employee.
It is now the individual who carries all the longevity, investment and shortfall risk, all of which was previously borne by the scheme, with an associated employer covenant. Employers offering defined benefits will employ actuaries to mitigate such risks and monitor the scheme’s ongoing funding requirements, but the burden now sits with the individual, often ill-equipped to plan alone around such complex factors.
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For example, in 2024, we know from the Financial Conduct Authority’s Financial Lives survey that only 25% of defined contribution holders aged 45+ had a clear plan on how they were going to take their pension money.
The start of any New Year offers an ideal opportunity to finally get round to giving some proper thought to your pension savings, due to having some more spare time than usual, or driven by the fresh impetus that the time of year naturally brings.
But in a world of constant change, pensions are no different.
The rules of the day are the ones that matter and there are significant changes on the horizon. So, any planning needs to take these into consideration.
From April 2027, unused pensions will no longer be exempt from inheritance tax.
This unwinds the last notable change to pension death benefits in 2015 which allowed the passing of unused pensions, tax-free, where death occurred before age 75. Where death occurred after age 75, income tax would apply to withdrawals at the beneficiary’s marginal rate.
We now face the dire prospect of both inheritance tax (where the nil-rate band is exceeded) and income tax (if death occurs after age 75, as above) applying to unused pensions on death.
Pensions are no longer a safe haven from tax on death. It is important to note though that the spousal exemption for inheritance tax purposes will apply in the normal way which is that unused pension funds that pass to a spouse or civil partner will be free from inheritance tax on the first death.
Nevertheless, many more people will seek to adopt a strategy to maximise drawdowns from pensions during their lifetime to mitigate the inheritance tax impact. Such withdrawals can fund a higher standard of living or can fund gifts for regular payments from pension income to pass on funds to future generations. The usual inheritance tax rules for gifts and regular payments from income apply.
Another important point to note here is that most pension death benefits are still at the discretion of the pension trustees. Whilst you can express your wishes, the pension trustees have the final say, taking account of the scheme rules and any relevant factors (like financial dependencies).
This deliberate structure was put in place to ensure that unused pensions were not considered as part of an individual’s estate for inheritance tax purposes. But this clearly will no longer be the case. It might well be that there will be a shift towards binding death benefit nominations in the future, but only time will tell.
The takeaway point is to ensure that expression of wishes continue to be regularly reviewed to assist pension scheme trustees in arriving at the right decisions. Expression of wishes can also be used to build in some flexibility.
For example, including adult children as beneficiaries, who wouldn’t normally be deemed as dependants, gives them the option of inheriting the pension (thus retaining the investment tax exemptions and having the ability to stagger withdrawals to incorporate tax planning) in addition to the default option of receiving a cash lump sum.
Looking even further ahead, from April 2028, the normal minimum pension age will increase from age 55 to 57.
If you were born between April 5 1971 and April 5 1973 then from April 6 2028 you will have to wait until you reach age 57 to draw any pension benefits, unless you have a ‘pension protected age’. This will depend on your specific rights under your particular scheme as at November 4 2021 (when the changes were announced). It expected that a pension protected age will apply to the few and not the many, as it is not a common feature.
With a multitude of factors to weigh up, when it comes to accessing your pension savings, independent financial advice can add a huge amount of value.
Indeed, the use of financial advice relating to how to access pensions is increasing – 51%, 54% and 59% of people with defined contribution pensions used a financial adviser in 2020, 2022 and 2024, respectively.
But like any journey, making a retirement plan starts with the first step. Whether you are happy to make such decisions on your own or, like a growing number of people, see the benefits in taking advice, this weekend might be the perfect opportunity to begin giving your pension savings some proper scrutiny. It will be well worth it in the long run.
Lee Halpin is head of technical services @sipp