Rachel Reeves inheritance tax raid is £3.4bn 'death duty' on pensions

Pension savers face a £3.4 billion inheritance tax raid amid a major shake-up of death taxes announced by Rachel Reeves.

Tens of thousands of grieving families face a new death duty on pensions and will be dragged into paying the dreaded 40 per cent charge for the first time.

From April 2027, pension pots will be included in the value of a deceased person's estate and subject to inheritance tax, the Chancellor announced during her maiden Budget.

The Treasury will rake in more than £3.4 billion from pension pots in the form of inheritance taxes by 2030, official forecasts reveal. 

Currently, private and workplace pension funds do not form part of your estate upon death and have not been liable for inheritance tax. 

Any remaining money left in a pension upon death can therefore be passed on to loved ones in a tax-efficient way.

But this will no longer be the case, with families facing a double tax charge of income tax and death duty on inherited pensions. 

The Government said the change would affect 8 per cent of all estates each year, hitting the equivalent of about 50,660 families. Families can pass on up to £325,000 after death free of inheritance tax – known as the nil-rate band. 

Couples who are married or in civil partnerships can combine their allowances to pass on £650,000.

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Anything above this is taxed at a rate of 40 per cent. Any money or assets left to a spouse or civil partner is exempt from inheritance tax and this will apply to pension wealth.

Pension experts have warned the reform will throw years of succession planning into disarray and many savers will be forced to overhaul their plans for passing wealth down to the next generation in order to shield their retirement pots from the taxman.

Baroness Ros Altmann, a former pensions minister, warned that the move will penalise younger generations and undermine future pension prospects.

She said: 'Taking away the ability for savers to pass on their funds as a pension for their offspring is a really bad decision, in my view. 

Pensioners will be encouraged to spend their pension while still relatively young, leaving much less to live on if they survive to older age.'

Mike Ambery, retirement savings director at Standard Life, part of pensions firm Phoenix Group, said the 'fundamental' change means savers will be more likely to draw money out of their retirement savings sooner to shelter them from inheritance tax.

The Government's official forecasting body, the Office for Budget Responsibility, expects savers to shield more than £2.2 billion from the new death tax by 2030. 

This includes withdrawing larger amounts from pensions to funnel the money into accounts and assets that are exempt from inheritance taxes.

The new death tax will largely apply to private pensions and those working in the private sector who have saved into modern defined contribution pensions.

Any remaining funds left in these pots can be left to loved ones.

The reform will not apply to public sector defined benefit pensions, which guarantee workers an income in retirement.

These pensions typically die with the saver and are not passed on to the next generation.