Labour’s ‘bombshell’ plan to levy inheritance tax on pensions will hit middle England and leave millions in poverty, a former pensions minister has claimed.
Ros Altmann claims the chancellor’s crackdown on prudent savers is ‘horribly reminiscent’ of a ‘death blow’
Gordon Brown inflicted when he removed dividend tax relief from UK pension funds in 1997.
Writing in the Mail, she warns Rachel Reeves that the new death tax is “more like confiscation than taxation” and could “destroy” the pension system.
And the boss of City wealth manager Quilter warned the move risked ‘undermining saver confidence’.
In her first Budget, Chancellor Reeves said that from April 2027 pension funds would no longer be exempt from Inheritance Tax (IHT). Currently, money left in a pension on death can usually be transferred tax-free if the deceased is under 75.
Tax rip-off: The current chancellor’s raid has been compared to the ‘fatal blow’ Gordon Brown (pictured) delivered when he removed tax relief for dividends from UK pension funds in 1997
But tens of thousands of bereaved families now face new charges on their pensions which will amount to £1.5bn a year by the end of the decade.
‘Budget announcement on inheritance tax is a potential disaster for pensions,’ says Altmann in today’s Mail.
‘This will mean less cash inflows, more early withdrawals, less pension fund investment in higher-yielding long-term assets and more pensioners relying on government benefits.
‘Millions are at risk of poverty in later life. The UK economy and markets will also suffer as less pension money is invested in the long term. It’s time to wake up.’
Families can pass on up to £325,000 on death, free of inheritance tax. Couples who are married or in a civil partnership can combine their allowances to transfer £650,000.
There is also an additional lump sum allowance of £170,000 per person if you leave your home to your direct descendants – see the box below for more on the rules.
All of the above is taxed at a rate of 40 percent.
Altmann warns that the pension changes proposed by Reeves mean many will face a form of double taxation as pensioners of those who die over 75 will be hit by both inheritance tax and income tax.
This would mean that basic rate taxpayers would face a levy of 52 percent on their inherited pension fund, while those with higher rates would pay 64 percent and 67 percent, respectively.
‘This is more like confiscation than taxation,’ says Altmann.
Steven Levin, chief executive of Quilter, said: ‘This looks like retrospective taxation of those who planned under the current rules.
The combined impact of 40 per cent IHT and income tax could lead to marginal rates of 64 per cent or 67 per cent. This is unconscionable.
‘Changing the rules soon after the introduction of pension freedoms risks undermining savers’ confidence.
‘The proposed changes will introduce significant complexity into an already overburdened system. Bereaved families will face significant stress and delay in accessing assets until probate is approved.
‘There are alternative ways of determining how pensions are taxed which would avoid excessive tax rates and give beneficiaries quick access to funds.’
The government faced a backlash over the proposal. In a letter to the chancellor, AJ Bell chief executive Michael Summersgill said: ‘If the Government proceeds with the proposals as written, they risk a fundamental undermining of the UK pension system.’
