The Autumn Budget and what this means for Pensions

The UK Government’s recent budget announcement that pensions will fall under inheritance tax (IHT) by 2027 has stirred considerable debate and concern.

This change marks a major shift in the treatment of pension savings. The Government argues that this move will increase contributions to public revenues, however, critics point to potentially serious ramifications for individuals’ retirement planning, wealth transfer decisions, and intergenerational financial security.

Pension pots in the UK have previously been protected from inheritance tax, a policy that has encouraged individuals to save for retirement with the reassurance that any remaining funds could be passed on to beneficiaries without incurring IHT. This IHT exemption has allowed individuals to make pension contributions throughout their working lives with the expectation that these savings will not be heavily eroded by taxes upon their death. In recent years, pension wealth has grown substantially, offering families a critical financial resource that has supported intergenerational wealth transfer and increased financial security.

How much IHT could I be taxed?

The introduction of IHT on pensions could have significant financial implications for families. The tax rate on inherited pension savings would be 40% on estates exceeding the current £325,000 threshold, potentially subjecting beneficiaries to substantial tax bills. This is on top of the current (and continuing) income tax liability of a beneficiary inheriting a pension where the owner dies at age 75 or over; leading to a double-dunt tax hit.

The new tax rule may lead to a shift in retirement planning behaviours. Many people might be more cautious about over-saving into their pensions if they know those funds could face heavy taxation upon inheritance. This shift could result in a reduced focus on pensions as a long-term savings vehicle and a potential increase in alternative financial strategies, like lifetime gifts, trusts, whole of life policies or other investment options that offer greater flexibility with respect to IHT.

While the government argues that extending IHT to pensions will help increase tax revenues, the potential adverse effects on individual financial security and economic mobility may outweigh these benefits. Ultimately, the 2027 policy change could reshape how future generations perceive pensions and how they approach retirement planning. For many, this change marks a pivotal shift in how they will think about financial legacy, and careful planning and adaptation will be crucial to navigating the potential tax implications.

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The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.