HMRC has confirmed that death duties of up to 40% will apply to unspent private pension pots
Families will face crippling inheritance tax bills on the pensions of loved ones who die before reaching retirement age under a controversial Labour plan.
In a move branded “abhorrent” by experts, HMRC has confirmed that death duties of up to 40% will apply to unspent private pension pots – even if the saver never had the chance to touch the money.
Chancellor Rachel Reeves first unveiled the changes in her first Budget last October, scrapping the current inheritance tax exemption on pensions from April 2027. But it was unclear until now whether the rules would also apply to those who die before the minimum pension age of 55 – due to rise to 57 in 2028.
Industry figures have condemned the move, warning it will punish families already reeling from the loss of a loved one.
Tom McPhail, an independent pensions expert, accused Labour of resorting to an “underhand raid” to plug gaps in its finances, adding: “The UK’s pension tax relief system is slowly collapsing under the weight of unfair and bureaucratic restrictions.”
Currently, pensions can be inherited tax-free if the holder dies before 75 (Image: Getty)
Currently, pensions can be inherited tax-free if the holder dies before 75, up to a £1.07million cap.
But the Chancellor’s shake-up will see inheritance tax levied on anything above the standard £325,000 threshold, with an extra £175,000 allowance for passing on a main residence to direct descendants.
The Government expects the tax grab to raise £1.5billion a year by 2029-30, despite pleas from the Investing and Saving Alliance to spare smaller pension pots under £90,000.
Official data shows pensioners have already rushed to pull £5billion from their pots in the first quarter of this year – the highest figure on record – in a bid to beat the April 2027 deadline.
Experts have warned such withdrawals could trigger a “retirement disaster” for many.
Ian Cook, of wealth manager Quilter Cheviot, told the Telegraph: “It’s particularly brutal when someone has built up savings with tax relief over decades, only for their family to lose almost half to the taxman if they die early. The message is clear – don’t save into your pension.”
A Treasury spokesman said: “We continue to incentivise pension savings for their intended purpose – funding retirement – and more than 90% of estates each year will continue to pay no inheritance tax after these changes.”
