The shake-up from the taxman means unspent defined contribution pensions will be included in inheritance tax calculations. When combined with income tax on withdrawals, families could lose almost 90 per cent of inherited pension savings in the worst cases
James Rodger Content Editor
09:37, 23 Oct 2025
HMRC could potentially charge state pensioners a staggering 87 per cent tax(Image: John_Lamb via Getty Images)
HMRC could potentially charge state pensioners a staggering 87 per cent tax on their pension savings. Retirees are being advised to “spend pension savings first” to avoid this exorbitantly high tax bill. Changes to Inheritance Tax (IHT) under the Labour Party government and HMRC reforms could result in thousands of families facing hefty bills as pensions are included in the tax net for the first time.
Moreover, Department for Work and Pensions (DWP) state pensioners could be hit with an enormous 87 per cent tax bill on their pension savings when new inheritance tax rules are introduced from April 2027. This overhaul by the taxman will mean that unspent defined contribution pensions will be factored into inheritance tax calculations. When combined with income tax on withdrawals, families could lose nearly 90 per cent of inherited pension savings in the worst-case scenarios.
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Labour anticipates that approximately 10,500 more estates each year will face higher tax bills as a result, reports Birmingham Live. Jonathan Watts-Lay, Director at WEALTH at work, commented on the findings: “For those who have already retired and have additional savings beyond their pension, a shift in thinking and strategy could be beneficial.
“From an IHT perspective, it could now be better to spend pension savings first and preserve other assets for later on. This is the opposite approach to what has previously been the case,”.
Mr Watts-Lay continued his cautionary advice, stating: “People will need to review their individual circumstances and seek guidance and advice.
“The focus should remain on making sure your pension provides the best possible income for your retirement, while keeping tax bills as low as possible,” he recommended.
He further added: “Many employers provide financial education and guidance in the workplace to help people understand their pensions including tax efficiency.”