Today, pensioners can pass on any unspent defined contribution pension pots to loved ones free of all inheritance tax (IHT). From March 2027, Reeves won’t allow that following today’s brutal Budget change.
Instead, unspent pension will be added to all your other assets and anything above the £325,000 nil-rate band will incur IHT at 40%.
It means almost anybody with a modest home and retirement savings will soon be hit with a tax that was originally aimed at the super rich. Especially with Reeves freezing the nil-rate band all the way to 2030.
This raises the question of whether anybody will bother saving into a pension knowing that if they die before spending it, HMRC will snaffle a brutal 40%.
It’s a particular nightmare for anybody who dies at a relatively young age, before they start spending their money.
Married couples and civil partners can inherit each other’s assets, including pensions, free of IHT. However, the growing number of cohabiting couples cannot.
If pension is built up in one partner’s name and they die early, 40% will have gone to the Treasury before the survivor gets what’s left.
There’s an even bigger risk.
Currently, if someone dies before age 75, their beneficiaries get all the pension without any tax taken off. But from age 75, they pay income tax on the money at their marginal rate.
As things stand, from March 2027 beneficiaries may have to pay two sets of tax before receiving an inherited pension. First inheritance tax, then income tax.
The impact will be horrific.
Let’s say someone dies aged 75 leaving £100,000 of pension chargeable to IHT. Straight away, £40,000 would go to HMRC.
Then, when the family drew the remaining £60,000, they’d pay income tax on the money at their marginal rate. So a higher-rate 40% taxpayer would lose another £24,000.
In total, they’d just get £36,000 from a £100,000 pension. That’s a scandalous tax rate of 64% on grieving families.
Someone who has tipped into the 45% additional rate income tax band would end up with just £33,000. They’d have paid a staggering 67% tax rate. That’s not just cruel, it’s authoritarian.
Let’s hope Reeves will tackle this during the consultation period by axing all income tax on inherited pensions. The double death tax must not happen.
Again, we have to ask the question: who would save money in a pension after today?
We need urgent clarification on this point so families can make informed pension decisions.
Reeves will argue that pensions were not designed as a vehicle to pass on wealth. That sounds fair, except for one thing.
Labour has ravaged private sector pensions. Former chancellor Gordon Brown’s 1997 stealth tax raid wiped out private sector defined benefit final salary pensions.
Today, these gold-plated schemes only exist in the public sector.
Private sector workers have to make do with defined contribution schemes, where returns aren’t guaranteed at all. Instead, they’re at the mercy of the stock market.
Private sector pensioners enjoyed just one advantage over the public sector. Policyholders could leave savings to beneficiaries free of IHT.
From March 2027, that advantage will go. I ask again, who’d save in a pension now?
