Treasury officials say they want to remove inconsistencies and provide equal treatment
13:26, 22 Sep 2025Updated 14:18, 22 Sep 2025
State pensioners are facing a double tax on unspent cash from next April, campaigners have warned(Image: Shared Content Unit)
Pensioners have been warned they are set to be hit by a double tax of 67 per cent in a major rule change.
More than 20,000 people have signed a petition calling for the Government to stop the reforms, which will come into effect from the start of the next financial year on April 6, 2027.
However, the Treasury has issued an official response, saying the changes are needed to prevent people from leaving private pension amounts to others in their will as a way of transferring wealth and to make the rules much fairer. At present, many types of unused pension funds can be handed down without any tax being due, while others are liable for HMRC charges.
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HM Treasury says it wants to stop private pensions being “openly used and marketed as a tax planning vehicle to transfer wealth, rather than as a way to fund retirement.”
A campaign launched on the official UK Government and Parliament petitions site is calling for Labour to abolish the double tax (inheritance tax plus income tax) on pension funds and death benefits.
Dozens of people from Sutton Coldfield, Solihull, Meriden, Bromsgrove, Kingswinford, and South Staffordshire are among those who have added their names.
Nathan Bridgeman, who started the petition, said: “The Government are introducing inheritance tax to pension funds and death benefits from April 2027. When you die, this may now result in a disproportionate and unfair double taxation on beneficiaries (income tax and inheritance tax), which we think results in a disincentive to funding a pension.
“We think the Government need people to take responsibility for providing income in retirement and the simplest and most effective way for the majority to achieve this is a pension.
“We think the tax on pensions funds and death benefits is a disincentive for most people to funding a pension. Many people want to leave their pension fund and death benefits to their chosen beneficiaries (usually children/grandchildren). We think this double taxation – income tax and inheritance tax – means a lot of beneficiaries may have to pay 67 per cent tax.”
But the Labour Government has rejected the calls, saying it is “crucial to ensure that tax reliefs on pensions are being used for their intended purpose – to encourage saving for retirement and later life – rather than for passing on wealth free of inheritance tax.”
Full response from the Government on inheritance tax changes for pensions
HM Treasury said in an official Government response to the petition: “More than 90 per cent of estates will still pay no inheritance tax each year. The Government is continuing to incentivise pensions for their intended purpose of funding retirement.
“Since taking office, the Government has taken a number of difficult but necessary decisions to restore economic stability, fix the public finances, and support public services. These have been tough decisions given the situation inherited by the Government.
“The decision to reform the inheritance tax rules on pensions was one of those decisions. This reform means that most unused pension funds and death benefits payable from a pension will form part of a person’s estate for inheritance tax purposes from 6 April 2027. This removes distortions resulting from changes that have been made to pensions tax policy over the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth, rather than as a way to fund retirement.
“The Government will continue to incentivise pension savings for their intended purpose of funding retirement, with ongoing tax reliefs on both contributions into pensions and on the growth of funds held within a pension scheme.
“Pensions continue to benefit from very significant tax benefits, with gross income tax and National Insurance contributions relief costing £78.2 billion in 2023-24. It is therefore crucial to ensure that tax reliefs on pensions are being used for their intended purpose – to encourage saving for retirement and later life – rather than for passing on wealth free of inheritance tax.
“These reforms also remove inconsistencies in the inheritance tax treatment of different types of pensions. Most UK-registered pension schemes are discretionary, which means members are able to nominate who they would like to receive any death benefits, but the scheme trustees are not obliged to follow the member’s wishes.
“Under existing rules, any unused pension funds and death benefits from discretionary schemes are not subject to inheritance tax. However, there are some pension schemes, such as the NHS and judicial schemes in the UK, which are non-discretionary. Under existing rules, these are subject to inheritance tax. The reforms the Government is making remove these inconsistencies and provide equal treatment whether the scheme is discretionary or non-discretionary.
“Estates will continue to benefit from the normal nil-rate bands, reliefs, and exemptions available. For example, the nil-rate bands mean an estate can pass on up to £1 million with no inheritance tax liability and the general rules mean any transfers, including the payment of death benefits, to a spouse or civil partner are fully exempt from inheritance tax.
“More than 90 per cent of UK estates will continue to have no inheritance tax liability in 2029-30 following these changes and the reforms will only affect a minority of those with inheritable pension wealth. Around 213,000 estates are expected to have inheritable pension wealth in 2027-28, with only 10,500 estates becoming liable to pay inheritance tax as a result of these reforms, and around 38,500 paying more than would previously have been the case.
“Most estates will not pay inheritance tax on the pension wealth and income tax is only due from beneficiaries on inherited pensions in certain circumstances. Significant tax relief is provided on pension contributions when payments are made into a pension because the Government wishes to encourage pension saving to help ensure that people have an income, or funds on which they can draw, throughout retirement.
“In cases where income tax is due on pension benefits paid to a beneficiary, contributions into the pension scheme will have received this tax relief when they were made. If the pension benefits had been withdrawn by the original member, they would have been liable to income tax. If the original member died with the cash (or assets purchased with that cash) then this would then generally be included in the valuation of their estate for inheritance tax purposes too and inheritance tax paid if appropriate.”
If the number of signatures hits 100,000, then the petition will be considered for debate in Parliament.
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