From 6 April 2027 defined contribution pensions will be subject to inheritance tax. The standard rate of inheritance tax is 40%.
UK households with private pensions risk losing 40% of pot to HMRC
An inheritance tax on pensions means UK households risk losing 40 per cent of their pots. Currently, defined contribution pensions, where you build up a pot of money to give you an income when you retire, wouldn’t normally be part of your estate and there would be no inheritance tax to pay.
The ‘estate’ simply means all the assets, like a house, investments or valuables, that someone owns when they die. But from 6 April 2027 defined contribution pensions will be subject to inheritance tax. The standard rate of inheritance tax is 40%.
Royal London advised: “If you have a lot of money in pensions as well as other assets then it might be a good idea to talk to a financial adviser to work out the most tax-efficient way to spend money in retirement. If you are 75 or over when you die, those who inherit your defined contribution pensions will have to pay income tax.”
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Rachel Vahey, head of public policy at AJ Bell, comments: “Despite a deluge of criticism the Labour Party government has decided to press ahead with plans to apply IHT to unused pensions on death.
“HMRC has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families.
“Options were put forward by the industry which would have been far more straightforward than bringing unspent pensions into IHT , while still raising the same amount of tax.
“Although most savers will be unaffected and should not need to change their financial plans, some now face difficult choices about how best to arrange their finances.
“Many have saved and invested in good faith and now face the possibility of punitive rates of taxation when passing pension money to their loved ones.
“Bereaved families also face a huge administrative burden, with the government insisting they settle the IHT bill within six months. Many people have complex financial affairs, especially those who die unexpectedly, meaning settling the bill quickly may not be straightforward.
“This change marks a significant shift in the tax treatment of pensions and anyone concerned about the proposals should think about speaking to a professional financial planner. IHT is a complex area but there are steps which can be taken to help people plan ahead and ensure they organise their financial affairs tax to be tax efficient.
Tom Selby, director of public policy at AJ Bell, warned: “There’s no escaping the fact that a chronic retirement under-saving crisis looms over the UK pensions system in its current form, and the latest government stats make for suitably grim reading.”
He cautioned: “Without pension saving rates increasing quite dramatically, the vast majority of people retiring in the 2050s will be kissing goodbye to even some of the more modest luxuries included by Pensions UK in its definition of a comfortable retirement.”
Selby said: “Unsurprisingly, these figures also show the self-employed face a daunting climb towards a decent standard of living in retirement.
“In essence, all signs are pointing to a nation that will be ill equipped to retire in any way comfortably by the middle of this century, if not sooner. More needs to be done to ensure savers, particularly lower earners and the self-employed, can retire with a decent standard of living, rather than scraping by on the state pension alone.”