Savers under pressure from Labour's IHT pensions 'plot'

LABOUR Chancellor Rachel Reeves's controversial plan to charge inheritance tax (IHT) on unused pensions moved a step closer last week, despite fierce criticism from financial experts and the pensions industry.

- Harvey Jones

In her Budget on October 30, Reeves said the policy would take effect from April 2027, following a consultation period that closed last Wednesday.

Reeves hopes the pensions IHT raid will boost Treasury revenues, but critics argue it will pile complexity, cost and distress on grieving families.

The proposals aren't set in stone but as they stand could cause immense damage.

TROUBLE

Currently, someone with a defined contribution pension - the type invested in the stock market - can pass on their unused pot tax-free if they die before age 75.

From that age, beneficiaries may pay income tax on withdrawals at their marginal rate, but there is no inheritance tax at any stage.

The Chancellor's plan would change this by imposing IHT on unused pensions, regardless of the deceased's age.

On death, unspent pensions would be added to all of the policyholder's assets, pushing more estates over the £325,000 nil-rate band. The excess would incur IHT at 40%.

This means huge numbers with a modest home and retirement savings would be hit by a tax originally designed for the super-rich.

With IHT thresholds frozen until at least 2030, the number affected will increase yearly. The IHT take is already at a record high.

Death-in-service payments from defined benefit (final salary) workplace pension schemes are also at risk from the tax raid.

DOUBLE