Spending to beat the taxman

Inheritance tax is levied at a rate of 40pc, but many of those caught in the net can expect much larger bills once income tax is factored in.

Andrew Tully, of investment platform Nucleus Financial, said: “A 52pc to 67pc overall tax bill will be commonplace, especially on the second death in a couple. It could even be as high as 90pc with other impacts, such as the loss of tax-free allowances on very large estates.

“HMRC is treating pensions as a capital asset for the purpose of inheritance tax, but also an income source for the purposes of tax. It’s a case of having your cake and eating it for HMRC, but not for the diligent pension saver.”

In response, many savers have withdrawn their cash to keep it out of the taxman’s hands.

Figures from the Financial Conduct Authority showed that savers withdrew a record £71bn from their retirement pots in 2024-25.

It marked an increase of almost £20bn from the previous year, as almost a million pots were accessed for the first time. Experts said this was a clear response to the inheritance tax changes.

Even though pension withdrawals can be accompanied by a 45pc income tax bill, the added threat of inheritance tax has forced many savers’ hands.

Ian Cook, of wealth adviser Quilter Cheviot, said: “I’ve got a client who’s bought a supercar, as he knows his children will lose that money to at least 40pc taxation when he dies.

“I’ve got another aggressively drawing down his pension because he doesn’t trust the Government to do the right thing when he’s gone. Another had a multimillion-pound pot, but withdrew half of it and gave it away.

“Both are paying higher and additional rate tax, but it still makes sense for them, as they could lose 67pc in tax under the new rules.”

But many savers are taking decisions on their own without consulting experts – and Mr Cook warned it could be a costly mistake.

“The majority of people are paralysed by fear because of these changes,” he added. “They’ve saved into pensions for years to support themselves, and their children and grandchildren after they die, only for the goalposts to suddenly move.”