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Bringing pensions within inheritance tax from April 2027 will result in a “massive increase” on the tax bill for the estates of wealthy UK pensioners, according to pension experts.
In the Budget, chancellor Rachel Reeves announced that she would remove a “loophole” that left pension funds exempt from inheritance tax and increasingly allowed them to be used as intergenerational wealth transfer vehicles.
The government estimates the move will raise £1.46bn a year by April 2030 and result in about 10,500 more estates paying inheritance tax than would otherwise have been the case.
Beneficiaries may also have to pay income tax on the pension proceeds even after inheritance tax has been deducted, if the pensioner dies after they turn 75.
Tom Selby, director of public policy at AJ Bell, said the inclusion of pensions in estates for the purpose of inheritance tax would mean a “massive increase” in tax bills for some wealthier people.
Rachel McEleney, associate tax director at Deloitte, said: “The removal of the inheritance tax exemption appears to result in a double hit on death benefits that do not qualify for an income tax exemption, such as those where people die over 75 years old.
“Assuming the whole fund is subject to 40 per cent inheritance tax, and the beneficiary pays income tax at 45 per cent on the remainder, this appears to give rise to an effective 67 per cent tax rate on taxable pension death benefits.”
The use of pensions for retirement planning became a particular concern among government officials after the lifetime allowance — which had been charged on pots over £1,073,100 — was abolished in 2023.
While the beneficiaries of inherited pensions already have to pay tax on the income from them if the deceased died after their 75th birthday, death before that date allows most schemes to be inherited free of all tax.
The Institute for Fiscal Studies think-tank said this resulted in a “bizarre situation” where pensions were treated more favourably by the tax system as a vehicle for bequests than as a retirement income product.
Pensions will still pass to spouse and civil partners without incurring an inheritance tax charge.
Mike Ambery, retirement savings director at Standard Life, said the change would result in a “fundamental shift” in how wealthier individuals think about accessing their money in retirement.
Experts said people were likely to start drawing down their pension savings in retirement instead of money saved in their individual savings account, to avoid a double tax hit for beneficiaries of both inheritance tax and income tax if they die after the age of 75.
“Carefully thought through implementation and clarity will be key, perhaps most prominently in the case of unmarried partners who could be at a disadvantage,” he said.
Some savers said the tax charge would be so large that it no longer made sense for them to work.
Ian Chapman, a 57-year-old accountant from Greater Manchester with a seven-figure pension pot, said “this change means realistically it’s not worth working for me — I’m going to pack up”.
“A lot of people in middle-income situations like mine will now be in inheritance tax — it’s a real shame,” he added.
Experts warn the move could also mean pensioners will be encouraged to spend their pensions while they are still relatively young, leaving much less to live on if they survive to older age.
“Most people underestimate their life expectancy, so they are likely to have spent their pension well before they reach their much later years,” said former pensions minister Ros Altmann, adding they would potentially have “less to live on than they otherwise would and less money to spend on elderly care”.
