Elderly individuals rush to withdraw inherited funds to evade Rachel Reeves's proposed inheritance tax hike
News Article: Upcoming Changes to Inheritance Tax and Pension Pots
Starting from April 2027, a significant change is set to take place in the UK's tax system, as defined contribution pension pots that are currently exempt from Inheritance Tax (IHT) will be subject to a 40% tax rate[1][2][3]. This change will have a profound impact on retirement savings and inheritance tax liabilities.
Impact on Retirement Savings and IHT Liabilities:
Up until now, unused private pensions have typically fallen outside the estate and thus avoided IHT, especially if the pension holder dies before the age of 75. However, starting in 2027, the balance of these pension funds will count toward the estate value subject to IHT[1][2][3].
When combined with the rest of the estate, pension balances could push the total estate above the IHT threshold, triggering a 40% tax charge on amounts above this threshold[1][3]. For deaths after age 75, there is also potential for income tax to be applied on pension withdrawals made by beneficiaries, effectively creating a double tax[2].
This reform will increase complexity and administration, as executors or personal representatives will need to identify pension balances, liaise with pension schemes, calculate the IHT liabilities using online HMRC tools, and pay the tax — adding complexity and potentially delaying inheritance distribution[5].
The new tax rules are likely to prompt individuals to seek tax planning strategies, such as gifting assets during their lifetime to reduce their taxable estate or reassessing retirement income and inheritance plans[4]. This change will also affect expatriates, particularly those living in countries popular with British retirees, such as Spain, France, Portugal, or Cyprus[3].
Motivation and Wider Context:
The government aims to close a loophole that allowed large pension savings to pass tax-free, thus increasing estate tax revenues and promoting more equitable taxation across different asset types[1][5]. Chancellors have also frozen IHT thresholds and reduced some other reliefs alongside this pension reform, leading to higher overall IHT receipts projected to rise significantly by 2030[4].
In the 2024-25 financial year, there was a marked rise in the amount people in their 80s took out of their pensions, with a 80% jump in the amount taken to £360 million, compared with a more modest rise of 25% the year before[1]. The sum withdrawn by people aged 75-80 rose 50% to £1.3 billion last year, and the amount taken out of retirement funds increased by almost a quarter to £5 billion in the first three months of this year[1].
These changes highlight the importance of individuals revisiting their retirement savings strategies and inheritance plans well in advance of 2027. It is crucial to understand the potential impact on one's estate and to seek professional advice to navigate these complex tax rules.
[1] HMRC figures [2] Adrian Murphy, Murphy Wealth [3] Claire Trott, head of advice at St. James's Place [4] Chancellor Rachel Reeves [5] Government statement on pension reforms and IHT changes
- To avoid unwanted surprises in their personal-finance, individuals planning their retirement may consider revisiting their savings and inheritance plans, as up coming changes to pension pots and inheritance tax may significantly impact retirement savings and inheritance tax liabilities.
- In light of the upcoming changes in the UK's tax system, it would be prudent for some to reassess their business strategies, as the reform may prompt an increase in complexities and administration, particularly in dealing with inherited pension balances.
- For expatriates resident in countries popular with British retirees, staying abreast of these changes in pension and inheritance tax rules will become increasingly important, as such changes will affect not only their personal-finance, but also the finance of their heirs.
