Pensions will now be subject to Inheritance Tax under dramatic rule change

A huge pension change that will directly impact your family has been confirmed by the new Labour Party government in today's Budget. The Chancellor confirmed pension savings will now be included as part of the "estate" of someone who has died from April 2027 and will be subject to Inheritance Tax.

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, warned the move will be disruptive to people's financial planning in later life - and said it will likely spark a rush of people gifting more money to loved ones while they are still alive.

She said: “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.”

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Gary Smith, financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said: "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%." Ms Reeves’ plan to close the tax gap won’t work without HMRC undergoing urgent improvements to their IT and staff training, say leading audit, tax and business advisory firm, Blick Rothenberg.

Fiona Fernie, a Partner at the firm said: “Despite the Chancellor’s suggestion that she is going to raise £6.5 billion in additional tax revenue per year using measures to ‘close the tax gap’, it is difficult to see how this is going to be achieved.”

She added: “The provisions set out show that only 200 additional HMRC compliance staff are due to start training in November this year and the training will inevitably take several months. In addition, the quality of HMRC staff appears to have declined in recent years, so there is arguably a need to improve the quality of the training they receive to the superb levels in past generations.”

Fiona said: “Furthermore, recent experience suggests that HMRC are not particularly adept at modernising their IT and data systems (MTD being a good example, but there are others, such as the dreadful online forms for making a disclosure of unreported tax liabilities).”

She added: “Her emphasis on promoters is also not necessarily appropriate. There have been a number of initiatives trying to clamp down on promoters with HMRC having been handed significant powers to pursue them but the tendency for promoters to ‘shape shift’ and/or move offshore makes them notoriously difficult to pin down.”