Today, pensioners can pass on any unspent defined contribution pension scheme to loved ones free of all inheritance tax (IHT). From March 2027, that will no longer be the case.
From 2027, the value of any 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 now pay a tax that was originally aimed at the super rich. Especially with the nil-rate band now frozen 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 get a chance to start spending the money they have saved.
Married couples and civil partners can inherit assets, including pensions, free of IHT. But the growing number of cohabiting couples cannot.
If pension is built up mostly 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, they’re beneficiaries get all the pension without any tax taken off. But from age 75, beneficiaries will pay income tax on the money at the marginal rate.
This means that from March 2027, beneficiaries would have to pay two sets of tax before receiving a pension from a grandparent, parent or cohabiting partner.
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 of that 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 of pension pot. That’s a tax rate of 64% on grieving families and would be scandalous, if it happens.
Let’s hope Reeves will tackle this during the consultation period by axing income tax on inherited pensions. It mustn’t be allowed to happen.
Again, we have to ask the question: who would save money in a pension if that happens? You’d be mad.
We urgently need clarification on this point so people can make informed pension decisions.
Reeves will no doubt argue that pensions were not designed as a vehicle to pass on wealth. There is some merit to that, except for one factor.
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 but are at the mercy of the stock market.
Their pensions enjoyed just one advantage over public sector schemes, as policyholders could leave their savings to beneficiaries free of IHT. That isn’t possible with most public sector schemes.
That advantage will now go. I ask again, who’d save in a pension after what Labour has done?