The government has confirmed that from April 2027, most unused pension death benefits will be included in the deceased’s estate for inheritance tax (IHT). There are a few exemptions however, such as death benefits paid to a spouse or civil partner or charity.
This has raised concerns for many who are funding pensions. Yet, for most people, concerns about IHT on pensions are likely overstated as many simply aren’t saving enough to meet their needs in retirement.
When the Basic State Pension was introduced in 1948, the average life expectancy1 was 66 for men and 71 for women. Today, a 65-year-old male has an average life expectancy of 86, and a female of the same age can expect to live until 89. This means that those retiring today could have two decades, or more, of retirement to fund.
An independent report by the Pension and Lifetime Savings Association2 (PLSA) has estimated the annual costs in retirement for different standards of living for singles and couples:
The full New State Pension is £11,973 a year in 2025/26, indicating those with little pension provision could face a significant shortfall.
A ‘moderate’ retirement allows for eating out once a week, running a small second hand car and taking a one week European holiday each year. As the figures quoted are after tax, a single person targeting a ‘moderate’ retirement would need gross income of nearly £36,000 a year. Assuming they retired at 65 and were entitled to the full New State Pension at 67, they would need a pension fund in the region of £600,000* to meet the ‘moderate’ standard of living, assuming their income increased each year by 3%.
A long life does not necessarily mean a healthy life either, as an ageing population is more likely to need care in later life, further increasing their retirement costs. The average cost3 of residential care in the UK is currently £1,266 a week, rising to £1,554 for dementia nursing care. Life expectancy4 in care homes ranges from 2.2 years for males aged 90 and over to 7 years for those aged 65-69, so the cost of care could quickly reach six figure sums for those who must fund it themselves.
Inflation increases the cost of living as prices rise. For example, someone who retired in 2015 with annual expenses of £20,000 would need £27,218 today5 to maintain the same standard of living. This figure rises to £34,845 for those who retired in 2005 and doubles to £40,509 for those who retired in 1995.
The state pension and defined benefit pensions increase annually to offer some protection against inflation. However, those with defined contribution pensions would need to factor in inflation to their retirement plans. Annuities can be linked to inflation, but this does come at a cost, as the initial starting annuity income would be lower. Those in drawdown have the flexibility to increase their income each year but would need to take care that they are drawing a sustainable amount, and they won’t run out of money.
Many retirees will need to draw most or all of their pension to meet living costs. While IHT could be a concern for those dying early with significant pension savings, there is a greater risk that individuals will outlive their savings. Those who are likely to die with significant wealth and are not relying on their pension in retirement may need to adjust their financial plans. For most people, the focus should be on ensuring their retirement savings can support their desired standard of living. Robust financial advice and planning are essential to navigate the fine line between financial security and a potential IHT liability.
1. Life expectancy calculator
2. www.retirementlivingstandards.org.uk
3. www.carehome.co.uk/advice/care-home-fees-and-costs-how-much-do-you-pay
4. Life expectancy in care homes, England and Wales – Office for National Statistics
5. www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth. The information contained in this blog post is based on 2plan wealth management Ltd’s current understanding of tax laws as at April 2025. These laws are subject to change at any time and 2plan wealth management Ltd cannot be held responsible for any decisions made as a result of this newsletter. Tax advice is not regulated by the Financial Conduct Authority
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