WRONG – People pay Inheritance Tax on Pots not PENSIONS!
Let’s get this right, pensions are paid as long as you live and cease when you die. From 2027 you can opt out of getting a pension pension to have your money as a pot – like it was when you were saving and if you die with a pot, that pot will be taxed for inheritance tax and if you are stinking rich you will have to pay40% tax if you are the lucky beneficiary of the money as an inheritance. But there’s nothing to pay if the person who died was the last survivor of a pension. Yes, that’s right – pensions won’t be taxed – only pension pots!
You will note , if you study these things , that this is a change of tax, previous to 2027 you didn’t have to pay IHT on an inherited pot if the money was part of a filthy rich estate. You will also note that the law making it “default” for a pot to turn to pension is happening will be brought in in 2027. Now of course , if you don’t swap to a pot but stick to a kind of pension that is infact a pot, you will get caught. But you can avoid that!
The reason behind this is simple, the Government give us lots of tax relief to save for a pension not a pot. Pensions are good because they make us take our money and hopefully spend our money and pay some tax along the way. This is what a pension does and rich people would rather sit on their money and not spend their money despite them getting the bulk of the tax relief to get it in the first place. I’m a relatively rich person- I know!
So there is nothing wrong in the Government asking us to give some of the money if we die before spending the pot on a pension or drawing it down to pay cash and taxes!
Think swapping your pot for a pension good news if you’re rich!
Pension companies that allow people to keep their pots in taxable state, explained to HMRC that it wouldn’t be proper for them to guess what tax was owing. Infact there was pretty well unanimous rejection of the job of tax collector. Now the FT tells us that bereaved families shouldn’t pay their tax.
“HM Revenue & Customs has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families,” said Rachel Vahey, head of public policy at AJ Bell.
I’m not quite sure who should pay the tax if not the people who owe it. People who have the wealth to inherit IHT bills generally have the wealth to find help.
The FT makes what I can only see be a positive
The removal of the inheritance tax exemption on pensions will lead to a fundamental shift in how wealthier individuals think about accessing money in retirement.
Let’s hope us rich folk start taking pensions as was intended.
They will be happy to know that if they are in a pension scheme which pays life insurance with “death in service”, they can leave what is life insurance without IHT. The HMRC have cleared this up and it is good news for the decreasing numbers of wealthy savers who are in occupational pension schemes paying this kind of benefit.
You can’t blame the Government for doing what it’s asked on payment of IHT or clarifying the situation on death in service. And they’re making a pension a default option, so long as you use one of those type that die with you!
You can’t blame the Government for creating the same law for the rich as for the poor. We all get the state pension , all us wealthy folk have the privilege of being in private pensions.
Let’s remember, being paid a pension is a lot better than hoarding a pot!
re “People who have the wealth to inherit IHT bills generally have the wealth to find help.”
I half agree. Wealth is of course relative and pensions should be used to provide for the costs of living beyond work.
Imagine a boomer couple who die childless, having lived off his small DB pension and their two state pensions, leaving their only property worth £300k (a modest dwelling bought when mortgage interest relief was available and houses cost a small multiple of a modest salary) plus a couple of ISAs and other liquid savings of £100k, plus their pension pots of £650k (the employer closed the DB some years ago but replaced it with a DC with total contribution of 15% of pay) has a total joint estate of £1,050k. Note they were being prudent and using UFPLS for occasional needs beyond their regular income, with the remaining DC pots still invested to keep the tax free element growing, and with an eye on future care home costs.
I doubt the couple viewed themselves as wealthy, comfortable yes, they had more than they needed for their lifestyle at present, but not rich.
The maximum applicable allowance is only £650k as they have no direct descendants to leave the house too (or maybe they have a child but are estranged so don’t want to leave the house to them). So £400k subject to IHT which at 40% would be an IHT bill of £160k, more than the liquid savings.
The IHT is due within 6 months on most of the assets (it might be possible to delay the payments for the house until it is sold) but it could easily take far longer for probate to be granted and the total estate value and beneficiaries of the pension to be agreed.
So a loan would be required to pay the IHT.
I don’t think this is a far fetched scenario for a large number of families, and having to take a loan to pay the IHT whilst the pension waits for the Trustee to make its enquiries and settle who is to inherit, and how, will become much more common too.
So yes, I agree, pension pots should be used not hoarded, but the plan was to use it when they needed it (ad hoc plus care home fees) so I don’t think it fair that IHT is owed, and owed so soon.
The IHT thresholds, the payment due dates and who should pay the tax, all need adjustment or far, far more estates are going to be caught and the incentive to be prudent and provide for whole of life costs with a pension is reduced.
When tax changes are retroactive it is the government cheating and at up to 83% is nothing less than theft.
It is bad enough to cap the fund size below a level sufficient to buy the annuity to replace income at a level described as comfortable but this theft will discourage decision makers to trust in pensions which will damage provision made for others. Deferred temporary annuities offering enhanced cash flow today and certain poverty in the future are no solution. Inflation stuck at above 3.5% fiscal drag will ensure the income purchased will also be suffering increased taxation as well as IHT and CGT ( the £325k IHT allowance should now be over £500,000 )
U.K. pensions have been designed for a bygone age for decades the possibility of the 100 year life has been been known and ignored. True value for money is growth above inflation not the cheapest transaction.
I am worried about lump sum death benefits that we pay if someone dies very soon after taking their pension. The vast majority of these are very small (given most of our 100,000 members were part time women with short service) but can help a bereaved family of a ‘young’ pensioner pay funeral bills etc. we won’t be able to pay out even the smallest of these now as we have to wait for the process to play out with the PRs, so whilst I see the logic for potentially big DC pots I think a de minimus could have been considered as I doubt that would have affected the tax take given the statistics on the numbers of estates impacted
I agree Kate.
In my personal submission to the IHT Technical Consultation in January I wrote:
Pension protection lump sum death benefit:
i. This is typically a small payment (usual maximum of 5 times annual pension linearly scaling down to 1/365th of the annual pension) of a benefit which during life is subject to income tax under the PAYE system.
ii. In a DB pension scheme at least, there are very unlikely to be any other benefits paid which could be subject to Inheritance Tax.
iii. As there is already a mechanism established to collect tax on the deceased’s pension payments, I would strongly suggest that, although the payment will be made to another individual under the rules of the pension scheme, the payroll/PAYE system could be utilised by assessing the lump sum payment to income tax in the same way as employment termination payments.
iv. In this way tax could be collected immediately, using existing procedures, related to the deceased’s tax position with the minimum of administration required of the Pension Scheme Administrator or the Personal Representative, and beneficiaries receive the payment without delay at probably a most critical and stressful time.
v. It also appears to me that a de minimis exemption or allowance would be appropriate against the full application of a 0T income tax code.
I hadn’t appreciated this degree of intricacy in implementing what seemed a simple benefit, thanks Peter and Kate/
Sorry Henry but I have to strongly disagree with you. First of all, it is not the filthy rich who end up paying this inheritance tax but prudent savers who built up their pension funds and bought property to live in.
I have no problem with inheritance tax applying at pensions however what I do object to is the retrospection. If pensions were pension for inheritance tax from April 2027 then I have no issue.
If you have chosen to buy an annuity or have a pension paid from a scheme how would you like the situation whereby the income is taxed as unearned income at an additional 15% from April 2027 whilst interest from savings is exempt from this tax.
Would there not be a hue and cry about the retrospection ?
The sole purpose of this exercise is to raise revenue nothing more nothing less. Interestingly, MP’s and “filthy”rich civil service mandarins with their generous final salary benefits of course don’t need to bother about inheritance tax on pensions. Funny that.
The consultation with the industry smacks of “Talk to the hand cos the face ain’t listening”. A case of dogma above common sense
Dear Comrade Henry,
I try to turn adversity to advantage so as there are insulting names being thrown about I thought I would look up the origin of the phrase “filthy rich” which originated during a time of profound economic inequality and hardship, first appearing in The Lima News during the early days of the Great Depression. It captured public sentiment about wealth accumulation during times of widespread suffering.
While some analysts warn of potential economic parallels between 2026 and 1929, the consensus among mainstream economists suggests cautious optimism rather than impending catastrophe.
However, the economic risks identified—including tariff policies, inflation, and market volatility—deserve careful monitoring as they share similarities with conditions that preceded the Great Depression.
Trump is making a bad situation worse and may come to be remembered as an American Mikhail Gorbachev.
The historical lesson remains relevant: periods of extreme wealth concentration and economic inequality often generate both linguistic expressions of public discontent (like “filthy rich”) and genuine economic instability that requires careful management and policy attention.
Non Dom policy has accelerated the exodus of millionaires (excluding their house) and for everyone that leaves you will just need to add 46 (estimate) average taxpayers.
The recommendation… Be careful of what you wish for.
Pots? Something tucked under the bed in days gone bye. A better description might be a reservoir of future spendable income and income tax.
I get a particularly strong reaction on this subject – one that I don’t understand. I am comrade to all blog readers , no matter how much they disagree with me – even JR.
Another change that will undermine confidence in pension saving and encourage spending now rather than saving. How many people will face a 40% inheritance tax on death after paying only 20% income tax throughout their working life?
Surely it would be more reasonable to limit tax relief on pension contributions to the basic rate and charge a 20% inheritance tax on unspent pots.
Its worse than that it is 40% then 20-45% plus the loss of the £2M estate could be 83% Heaven help you if you bought the mandated MBBA ( make Britian Broke Agin) infrastructure with no market to create liquidity Interest due on IHT should see off the remaining 17%
Rates like these amount to a punitive tax on thrift and personal responsibility. Another reason to buy a Lamborghini.