Labour is planning to introduce a major tax change in April 2027 that will see inheritance tax of up to 40 per cent apply to private pensions
Chancellor Rachel Reeves
The Labour Party government has unveiled plans for a significant HMRC overhaul targeting those below retirement age. Pre-retirement individuals are facing an HMRC tax assault should they pass away prematurely, with pensions squarely in the crosshairs.
HMRC has announced that inheritance tax of up to 40 per cent will be imposed on private pensions from April 2027, irrespective of whether the saver dies before the current withdrawal age of 55.
Labour Party Chancellor Rachel Reeves’ strategy to scrap the existing exemption will align pensions with other assets for taxation purposes, potentially saddling grieving families with a substantial bill.
Under the present system, retirees can access unlimited sums from their pot once they reach 55, reports Birmingham Live. The “normal minimum pension age” of 55 is set to increase to 57 in April 2028 under the Labour Party government.
Inheritance tax is levied on all assets exceeding a £325,000 threshold, referred to as the “nil-rate band”. The allowance rises by £175,000 when you bequeath your main residence to a direct descendant, according to HMRC guidelines.
Currently, pensions are passed on entirely tax-free if the deceased was under 75, up to a ceiling of £1.07m. Families whose late relative died aged 75 and above must pay income tax on inherited pensions.
However, under the restructuring, UK households are confronting death duties of up to 40 per cent being levied on unspent private pension pots.
The Government expects the tax grab will generate approximately £1.5bn annually by 2029-30. The Investing and Saving Alliance (Tisa), a lobby group representing hundreds of financial services firms, has implored Ms Reeves to exempt savers with pension pots of less than £90,000.
Meanwhile, some tax experts have cautioned that these withdrawals could lead to a retirement “disaster” for middle-class pensioners.
A Treasury spokesperson stated: “We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth – and more than 90pc of estates each year will continue to pay no inheritance tax after these and other changes.”