Families are being encouraged to prepare for a significant new tax on pensions that is set to be introduced soon. Chancellor Rachel Reeves announced a major expansion of inheritance tax at last year’s Autumn Budget, setting out that it will soon apply to pensions. Ministers are yet to confirm the exact details of how the tax will be collected.
Yet an earlier Government consultation provided an outline of what these changes will entail. The document states: “Most unused pension funds and death benefits will be included within the value of a person’s estate for inheritance tax purposes and pension scheme administrators will become liable for reporting and paying any inheritance tax due on pensions to HMRC.”
Now Chris Ball, CEO of financial advisory firm Hoxton Wealth, has urged pension savers to plan ahead for these changes. He warned that the change will prompt a “major shift” in how people need to think about their long-term finances.
He urged: “Anyone likely to be affected should start reviewing their arrangements now, which means reviewing who you’ve named to inherit your pension, considering whether to draw down more during retirement rather than leaving large untouched pots, and weighing up the use of other tax-efficient vehicles such as ISAs or lifetime gifting strategies.”
Many pension schemes have a form known as an ‘expression of wish and nomination’, where you can specify who you’d like your pension to go to if you don’t draw down from it. While this isn’t legally binding for the pension provider, they will consider your wishes when deciding who to pay out your pension to.
How much could inheritance tax on pensions be?
Inheritance tax is charged at 40 percent on the total assets you leave behind when you pass away. There are several individual allowances that allow you to pass on up to a certain amount tax-free, including a standard £325,000 allowance, as well as a £175,000 allowance if you’re passing on your main residence to a direct descendant.
So, if you had a £10,000 pot of pensions when you passed away, if the entire amount was subject to inheritance tax, your successors would have to fork out £4,000 in tax. Mr Ball said the looming change has caused frustration for some families.
He said: “There is understandable frustration among savers who have contributed for decades under the assumption that pensions would remain outside inheritance tax. While Governments can change tax policy at any time, altering long-standing expectations always risks feeling unfair, particularly for those near retirement with limited scope to adjust.”
Pensions are set to become subject to inheritance tax from the beginning of the 2027/2028 tax year, starting on April 6, 2027. When questioned if the Government could postpone bringing in the new policy, Mr Ball said: “The April 2027 start date could theoretically slip if the policy detail isn’t ready.
“This has happened with complex pension rules before, but people shouldn’t rely on a delay.” He suggested that the larger issue is whether the tax benefits associated with pensions should be reduced.
He said: “There’s a balance to strike. Incentives must be attractive enough to encourage retirement saving, yet not so favourable that pensions become purely an inheritance planning tool. If the Government feels the pendulum has swung too far, it may look to tighten reliefs elsewhere rather than rely solely on inheritance tax.”
