Ministers are pressing ahead with the controversial reforms, which some critics have described as a “punitive double tax hit” on inherited pensions.
Double HMRC tax hit on pensioners confirmed as Labour ignores warning
Starting in 2027, families inheriting pension savings will be responsible for calculating and paying inheritance tax (IHT) on those funds, rather than pension providers handling the process, the Labour Party fovernment has confirmed.
Despite strong opposition from tax experts and financial advisors, ministers are pressing ahead with the controversial reforms, which some critics have described as a “punitive double tax hit” on inherited pensions.
Under the new rules, when someone dies after the age of 75, their remaining pension pot will be subject to both inheritance tax and income tax when withdrawn by beneficiaries. In certain cases, this could result in a combined effective tax rate of up to 64%.
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Labour’s decision spares pension scheme administrators from having to process tax deductions and payments directly to HMRC. The original proposal would have placed this administrative burden on the schemes themselves before passing on the remaining pension funds to the deceased’s estate.
However, a policy reversal means that responsibility for dealing with these complex tax obligations will now fall on executors or personal representatives managing the estate.
In a significant concession, the Government has agreed to exempt all ‘death in service’ benefits from the inheritance tax changes, following widespread criticism.
Rachel Vahey, head of public policy at AJ Bell, said: “Despite a deluge of criticism government has decided to press ahead with plans to apply IHT to unused pensions on death.
“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.”
“Life is tough enough when you have just lost a loved one without having extra layers of bureaucracy on top,” says former Pensions Minister Steve Webb, who is now a partner at pension consultant LCP.
“In future, the person dealing with the estate will need to track down all of the pensions held by the deceased which may have any balances in them, contact the schemes, collate all the information and put it into an online calculator and then work out and pay the inheritance tax bill.”