Labour has given the green light to a "hugely disappointing" tax raid on pensions despite widespread backlash to recent reforms unveiled by Chancellor Rachel Reeves in last year's Autumn Budget.
The Government has confirmed that bereaved families will bear the responsibility for calculating and paying inheritance tax on inherited pensions from April 2027, abandoning earlier proposals that would have required pension schemes to handle these duties.
Personal representatives managing estates must now track down all pension holdings, gather valuations, and settle any death duties before receiving probate. This policy shift means executors and administrators will manage pension-related inheritance tax alongside other estate assets.
Ministers acknowledged that requiring pension providers to deduct and pay the tax directly would have created unnecessary complications for estates with no inheritance tax liability and caused payment delays to beneficiaries.
GETTY / PA
|Britons are being warned that pensions will be targeted in a looming tax raid
Pension analysts have expressed alarm about the administrative burden facing grieving families under the new regime. Roddy Munro from Quilter described the changes as a "seismic shift" that risks transforming targeted tax reform into an "administrative minefield."
Craig Rickman, a pensions expert at interactive investor warned the proposals could cause "lengthy probate delays and additional costs, which may cause unnecessary distress to grieving family members".
He cautioned that the changes might "damage trust and confidence in a pension system that is already on shaky ground". The six-month deadline for inheritance tax payment remains unchanged.
This is despite the added complexity of tracking multiple pension pots. Interest charges of 8.25 per cent annually apply to late payments, creating additional financial pressure during bereavement.
Do you have a money story you’d like to share? Get in touch by emailing money@gbnews.uk.
PA | Households could be hit with a tax raidBehavioural shifts are already emerging as savers respond to the impending changes. Craig Rickman noted that "consumers are already altering their behaviour ahead of April 2027, in some cases making pension withdrawals sooner than previously intended in fear of loved ones being hit with exorbitant tax bills."
These premature withdrawals could compromise retirement security, with savers potentially depleting funds needed for future care costs. Rickman warned this trend "could not only lead to poorer outcomes in retirement" but might leave individuals without sufficient resources for essential expenses.
Executors will need to identify every pension pot held by the deceased, contact multiple providers, and compile comprehensive valuations before calculating the tax liability through online tools. This process must be completed within the standard six-month inheritance tax deadline, starting from the month following death.
Former Pensions Minister and LCP partner Steve Webb warned that "life is tough enough when you have just lost a loved one without having extra layers of bureaucracy on top".
He highlighted that all pension tracking and calculations must occur before probate applications can proceed, potentially causing substantial delays in estate administration.
Complications are expected when families cannot locate all pension holdings or when providers are slow to supply necessary information. HM Revenue and Customs (HMRC) faces pressure to reconsider penalty rules to avoid fining families for delays beyond their control.
LATEST DEVELOPMENTS:
GETTY | Rachel Reeves confirmed the changes to inheritance tax last year
Following protests from unions and employers, the Government has exempted death-in-service benefits from the inheritance tax changes. Ministers acknowledged "inconsistencies" in their initial proposals and confirmed these workplace benefits would remain outside the new rules.
The exemption provides relief for families of working-age earners, with Pete Maddern from Canada Life noting these payments offer "a critical short-term financial lifeline for loved ones". However, the double taxation issue persists for other inherited pensions.
Beneficiaries inheriting from someone who died after age 75 face both inheritance tax at 40 per cent and income tax on withdrawals at their marginal rate. For higher-rate taxpayers, this creates an effective tax burden of 67 per cent, rising to 70.5 per cent for estates exceeding £2million due to residence nil-rate band tapering.
The reforms, expected to generate over £1billion annually by decade's end, represent what Roddy Munro termed "a massive transfer of private wealth back to the state."