Early pension withdrawals rise amid tax reforms

Findings from STEP haverevealed that over four in five practitioners have observed clients withdrawing pension funds early, a trend driven by impending inheritance tax (IHT) reforms slated to take effect in April 2027. The research, which surveyed 115 STEP members, found that a staggering 93% of practitioners reported clients expressing concern over how these upcoming changes would affect pensions.

The survey highlighted that 81% of practitioners have witnessed clients altering their estate or pension strategies in response to the proposed IHT reforms. Notably, 83% reported an increase in clients opting to withdraw their pension money sooner than originally planned, while 77% indicated clients are increasing lifetime gifting. Additionally, many clients are revising their wills or trusts (66%) and changing the beneficiaries of their pensions (50%). A noteworthy 29% of practitioners have even seen clients entering into marriages or civil partnerships as part of these financial adjustments.

Overall, 97% of the practitioners expressed that the IHT changes will complicate estate planning for clients, with 83% of them believing this complexity will be significant. Emily Deane TEP, Technical Counsel at STEP, expressed concern about the risks of clients withdrawing pension funds prematurely, stating, ‘Without professional advice, the risks of getting it wrong are high and costly.’

The trend of withdrawing funds early is further compounded by clients placing less money into pension savings, with 60% of practitioners noting this emerging behaviour. Instead, individuals are looking towards alternatives like ISAs, which aligns with 21% of practitioners observing that people are now more hesitant to take on the role of executor or personal representative. Deane emphasised that the importance of specialised advice cannot be overstated, urging clients to consider the long-term implications of their financial decisions.

Practitioners highlighted several client concerns, with 86% naming the potential IHT bill on pension funds as their top worry. In anticipation of future tax liabilities, some clients are purchasing annuities or life insurance to cover expected charges, according to 41% of practitioners surveyed.

STEP members also warned about the potential exploitation of anxious clients, with Robin Melley TEP noting that many individuals seek advice from unreliable sources rather than professionals, leading to unwise financial choices. Melley remarked, ‘I am seeing wider evidence of this, including people with accumulated funds making unwise kneejerk decisions to “avoid their pension funds being subject to IHT.”’

In light of these concerns, STEP urges the government to revise the IHT pensions legislation. As Deane pointed out, the current framework carries significant flaws, potentially leading to a “catch-22” scenario where families must settle tax obligations before being able to access funds. She reiterated the need for legal amendments, stating, ‘There is still the opportunity to amend the legislation so that it is fairer, and provides people with greater clarity and certainty.’

As discussions around these proposed reforms continue, STEP has expressed a desire for a more transparent approach from the government regarding tax policy. The findings from this research underscore the pressing need for clients to engage with qualified professionals to navigate their estate planning amid these significant upcoming changes.