Families inheriting pension savings could face a significant "double tax" hit from April 2027, under new Government rules that will bring unused pension pots into the scope of Inheritance Tax.
In some cases, beneficiaries may have to pay both Inheritance Tax and Income Tax on the same pension wealth, reducing the amount ultimately passed on to loved ones.
Fresh Government guidance has confirmed how the changes will work in practice, prompting wealth management firm Saltus to warn that the long-standing tax advantages of passing pension savings between generations will be substantially weakened.
The reforms will also create additional administrative challenges for bereaved families, who may have to navigate multiple pension providers while calculating the tax due on inherited funds.
Under the new rules, families will have just six months to settle any Inheritance Tax liability on an estate. Interest will begin accruing on unpaid amounts after that deadline.
The timeframe could prove particularly difficult where an individual held several pension arrangements with different providers or where estates contain assets that are not easily converted into cash, such as property.
Henrietta Grimston, Chartered Financial Planner at Saltus, said: "Administratively, the new requirements will be very difficult to adhere to.
"Managing multiple pension providers at once, getting the valuation of the unspent pension and working out the proportional share on each of those pensions is a time-consuming process."
Families warned inheritance tax bills could jump by £34,000 under pension crackdown | GETTYBeneficiaries must choose between instructing the pension provider to pay a proportionate share of the IHT bill or covering the entire liability from other estate assets.
Where the sum exceeds £1,000, pension providers are required to transfer the payment to HMRC within 35 days of notification.
Ms Grimston cautioned that personal representatives need to carefully consider how they allocate the tax burden to avoid inadvertently disadvantaging certain beneficiaries.
Where the sum exceeds £1,000, pension providers are required to transfer the payment to HMRC within 35 days of notification
| GETTYShe noted that when the deceased was over 75, withdrawals from inherited pensions attract Income Tax at the beneficiary's marginal rate, meaning higher and additional rate taxpayers face charges of 40 per cent and 45 per cent respectively.
The Saltus Wealth Index, which surveyed 2,000 UK adults holding at least £250,000 in investable assets, found that more than a quarter of high net worth individuals are now exploring ways to shield their pension savings from IHT.
Additionally, 21 per cent expressed concern about how the changes would affect their ability to pass on pension benefits.
Britons are being warned about a potential pension mistake | GETTY The firm suggests several approaches that may help reduce exposure, including withdrawing tax-free cash in stages rather than as a single lump sum.
Other potential mitigation strategies include making gifts from surplus income, placing life insurance policies in trust, and leaving bequests to charitable organisations.