It is often described as the most hated tax of them all. So why are so few political parties offering to reverse the government’s plan to levy inheritance tax on pensions?
For years pensions have been positioned as a sensible long-term financial planning tool. They come with generous tax advantages and, crucially, have been seen as an efficient way to pass on wealth to the next generation.
That is not accidental. Encouraging people to fund their retirement reduces pressure on the state. The system has, broadly speaking, been designed to reward long-term saving.
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From April 2027, though, that will begin to shift because unused pension funds and some death benefits are set to be brought into the scope of inheritance tax.
The chancellor, Rachel Reeves, announced the policy in the 2024 autumn budget, and on paper it seemed to be a straightforward revenue-raising measure; in reality, it has already changed savers’ behaviour.
Savers are beginning to rethink how they use pensions, moving away from pure retirement income and towards estate planning. Conversations are shifting. Interest in annuities is picking up. Giving away money and assets is back on the agenda.
That change in behaviour was entirely predictable. When the rules move, people move with them.
One of the most notable shifts is the renewed interest in annuities. For a long time they were out of favour — low rates and the flexibility offered by the new pension rules made them look outdated. But now they are being viewed through a different lens.
Annuity income can be used to fund regular gifts. And under existing rules, gifts made out of surplus income, which form part of a normal pattern of expenditure, can fall outside the estate for inheritance tax purposes. In simple terms, this creates a route to move money out of a pension and into the hands of the next generation without triggering an inheritance tax charge.
This is not a new rule, but it is back in focus as people look for ways to navigate the change.
That matters, because the success of a policy depends heavily on how people respond to it.
Official costings suggest that bringing pensions into the inheritance tax net could raise meaningful sums — some £1.6 billion by 2030. But those projections come with an important assumption that behaviour remains broadly unchanged.
History suggests that is unlikely. The Office for Budget Responsibility has consistently said that tax changes affecting pensions tend to be front-loaded: revenues initially rise, but then fall as people adapt. What looks like a strong revenue stream at the outset can weaken over time as individuals restructure their finances.
We are already seeing this kind of adaptation. And if more people alter how they draw their pensions, shift assets, or use alternative strategies to pass on wealth, the eventual tax take could fall well short of expectations.
This is where the political calculation becomes more complicated. It is easy to assume that a future government could reverse a policy like this. Inheritance tax is deeply unpopular and pensions have long been treated as a protected space. There is also a broader policy tension here — governments want people to save, but measures such as this risk undermining that incentive.
But a policy can only be reversed if you can afford it.
If this change raises substantial sums for the Treasury, it becomes much harder to unwind. Any government looking to reverse it would need to replace that revenue through either higher taxes or lower spending. In the context of a fully costed manifesto, those trade-offs are real and often politically unpalatable.
If, on the other hand, the policy raises far less money than expected, the calculation shifts. A measure that is politically unpopular and fiscally underwhelming is easier to abandon.
In that sense, this policy may contain the seeds of its own future. The more people who change their behaviour in response to it, the less revenue it generates. And the less revenue it generates, the easier it becomes to justify reversing it.
For now, though, there is little indication that any party will commit to scrapping it.
This is a significant policy change, but one with a high degree of uncertainty that leaves savers in an uncomfortable position. Treat it as permanent, and you risk making decisions that may later prove unnecessary; assume it will disappear, and you risk exposing your estate to a tax charge that could have been avoided.
The bigger issue is what this signals. Pensions rely on long-term confidence in the rules. People commit money over decades on the assumption that the framework will remain broadly stable. When that confidence begins to weaken, behaviour changes.
The real story here is not just about tax. It is about trust.
Antonia Medlicott is the founder of the personal finance site Investing Insiders