A significant change to how pension savings are passed on after death is sparking debate, with the government defending its position against a growing public campaign.
From April 6, 2027, a new rule will mean that most unused pension funds left to beneficiaries will be considered part of a person’s estate for Inheritance Tax (IHT) purposes. Campaigners argue this could create a “double tax” scenario for some, where the inherited pension is subject to both Income Tax and Inheritance Tax, potentially leading to a combined tax rate of up to 67% for higher-rate taxpayers.
This has led to a petition, which has garnered over 20,000 signatures, calling on the government to scrap the plan. However, in an official response, the Treasury has stood firm, stating the reform is necessary to ensure fairness and that pensions are used for their primary purpose: funding retirement.
Why is the Government Making This Change?
The government’s stance is that the current system has become unbalanced. Over the years, pension rules have evolved in a way that allows them to be used as a powerful tool for inheritance tax planning, sometimes overshadowing their main retirement income function.
A Treasury spokesperson stated: “This reform removes distortions 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 also highlights a key issue of fairness. Currently, whether an inherited pension is subject to IHT depends on the type of pension scheme. Discretionary schemes (most common private pensions) are exempt, while non-discretionary schemes (like some public sector pensions) are not. The 2027 change aims to create a level playing field, treating all pension types equally for IHT.
The Campaigner’s View: A “Disincentive to Save”
Nathan Bridgeman, who started the petition, argues that the potential for a heavy tax bill will discourage people from saving adequately for their old age.
“We think this double taxation means a lot of beneficiaries may have to pay 67 per cent tax,” he said. “This results in a disincentive to funding a pension… Many people want to leave their pension fund to their chosen beneficiaries, usually children or grandchildren.”
The petition needs 100,000 signatures to be considered for debate in Parliament.
Who Will Actually Be Affected?
It’s crucial to understand that the government estimates most people will not be impacted.
They state that over 90% of estates in the UK pay no inheritance tax at all, a figure they expect to remain true after 2027. This is due to generous allowances, primarily the Nil-Rate Band (£325,000) and the Residence Nil-Rate Band (up to £175,000), which can combine to protect up to £1 million for families passing on a home to direct descendants.
The Treasury estimates that in 2027-28, only around 10,500 estates will become newly liable for IHT because of this pension reform, with another 38,500 paying more than they would have under the old rules.
Key Takeaways:
The Change: From April 2027, unused pension funds in most schemes will count towards your estate’s value for Inheritance Tax.
The Goal: The government wants to refocus pensions on retirement income and create consistency across different pension types.
The “Double Tax”: This can occur if a pension is left to a non-spouse beneficiary. They may pay Income Tax on the withdrawals (depending on the age of the original holder at death) and the value of the pension may have contributed to an IHT bill on the estate.
The Reality: The vast majority of estates (over 90%) will still pay no IHT. Transfers to a spouse or civil partner remain entirely tax-free.
If you are concerned about how these changes might affect your long-term financial planning, it is always recommended to seek independent financial advice tailored to your personal circumstances.
Answers to “People Also Ask” Questions (Based on Google Search Intent):
Q: What is the new pension inheritance tax rule?
A: Starting April 6, 2027, money left in most private pension pots when you die will be included in the value of your estate for Inheritance Tax purposes. This change is designed to create a fairer system and ensure pensions are primarily used for retirement income.
Q: How can I avoid inheritance tax on my pension?
A: Under the new rules from 2027, it becomes harder to shield pension wealth from IHT entirely. However, existing allowances still apply. You can pass on up to £1 million (including your home) to direct descendants without IHT. The most effective way to avoid IHT on pensions remains leaving them to a spouse or civil partner, as these transfers are always tax-free.
Q: Is there really a 67% tax on inherited pensions?
A: A 67% tax is a potential worst-case scenario, not the norm. It could happen if an estate is large enough to pay the 40% Inheritance Tax rate, and the beneficiary receiving the pension is also a higher-rate Income Tax payer. However, this combination will affect only a small minority of individuals, as most estates fall below the IHT threshold.
Q: Why is the government changing the pension death benefit rules?
A: The government states two main reasons: 1) To stop pensions from being used primarily as a tax-efficient way to pass on wealth, rather than for funding retirement. 2) To create consistency, as currently, the IHT treatment depends on the type of pension scheme, which they see as unfair.