Huge pension change announced in Budget that will directly impact families

Chancellor Rachel Reeves has indicated major shifts in taxation policy with the announcement that pensions will soon be affected by Inheritance Tax, as outlined in her Autumn Budget. From April 2027, pension savings will be considered part of the "estate" of a deceased person and liable for Inheritance Tax, representing a significant change from current legislation.

At present, inheritors of pensions do not pay tax if the original holder dies before the age of 75. However, should the pension holder pass away after turning 75, beneficiaries pay Income Tax on the drawn pension, treating it as income.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, cautioned that this shift could disrupt financial strategies for those planning their later years. She predicts an increase in early gifting to relatives and a move towards spending pensions rather than saving them, actions aimed at keeping estates under the Inheritance Tax threshold.

Additionally, according to Morrissey, there may be heightened interest in annuities as individuals seek to guarantee income while managing estate size for tax purposes, the Mirror reports.

Morrissey’s statement: "They will also look to spend down their pensions as retirement income rather than leave them untouched, a move which could keep the rest of someone's estate below the IHT threshold. We may also see an increased interest in annuities as people look to secure a guaranteed income while also keeping their estate below the inheritance tax threshold."

Gary Smith, financial planning partner and retirement specialist at Evelyn Partners, has highlighted a significant shift for retirees and savers, stating: "Retirees and savers have 18 months to review their long-term plans. As defined contribution pension funds could now be subject to up to 40% IHT on death, we will probably see greater withdrawals from pension pots. Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40%."