The Chancellor’s decision to make unused pensions liable to inheritance tax (IHT) will reduce the motivation to save for retirement, when many are already saving too little or not at all, says RSM UK.
Following the Budget, most unused pensions pots will be subject to inheritance tax from April 6 2027. The amount of IHT could vary significantly, depending on circumstances, but in some cases inherited pension pots could face an effective overall tax rate of 90% when they are withdrawn. One rationale behind the change was to remove taxpayers’ “incentive to use pensions as a tax-planning vehicle for wealth transfer after death.”
Ian Bell, head of pensions at RSM UK said: “This move disincentivises saving into pensions at a time when we know many already fail to save enough for a comfortable retirement. Some unused pension pots inherited upon death could soon be subject to eyewatering tax liabilities. Prior to this, pensions had been viewed by the government as a good vehicle to encourage people to start saving more, safe in the knowledge that if they don’t spend it, the money could be passed on to their children without an IHT liability. From an auto-enrolment perspective, we need the government to encourage employers and individuals to put more money into pensions, and this change is likely to have the opposite effect. Adding IHT to inherited pensions seems counter-intuitive to the overall aim of encouraging more pensions saving.”
The precise rules as to how this will work remain subject to confirmation. A consultation was published on 30 October 2024 and will run for 12 weeks until 22 January 2025.
