Pensions experts have warned about the repercussions of the government pressing ahead with levying inheritance tax on unused pension funds and death benefits from 2027.
The move was announced in last year’s Autumn Budget but faced a barrage of criticism on the grounds it will further complicate saving for retirement. Following a technical consultation, the government confirmed on Monday (21 July) the plans would go ahead.
Rachel Vahey, head of public policy at AJ Bell, lambasted HMRC for ignoring alternative options put forward by the industry.
“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.”
Craig Rickman, pensions expert, interactive investor, said the proposals are “fraught with issues”, such as lengthy probate delays and additional costs.
“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 and facing an administrative maelstrom,” he added.
“This could not only lead to poorer outcomes in retirement, but damage trust and confidence in a pension system that is already on shaky ground.”
Julie Hammerton, managing partner, Hymans Robertson Personal Wealth, said it will be more likely pensions are used for an income in retirement, rather than for passing on wealth to future generations.
“As well as seeing pensions being ‘spent’ more in retirement, we may also see more gifting of withdrawn pension funds to dependents,” she said.
“We may also see an uptick in annuity purchase, as this removes pension pots from the estate. Now would be a good time to review beneficiaries for pensions, as pensions passed to a spouse receive different treatment to other beneficiaries.”
