UK Households to Face £65k Inheritance Tax on Pensions

UK households are bracing for a substantial financial impact as Labour deliberates a new proposal to introduce a “death duty” from October, amidst the ongoing cost-of-living crisis. This initiative, aimed at addressing a £22 billion deficit inherited from the Conservative Party, has placed inheritance tax on pensions under intense scrutiny.

## Potential Impacts of New Inheritance Tax Proposal on UK Households

Tom McPhail, a specialist at The Lang Cat financial consultancy, expresses grave concerns over the looming possibility of a “death tax” on pensions. He argues that a taxation raid on pension funds poses a “real risk” with Labour at the helm. Current studies highlight that families inheriting pension pots valued around £100,000—average savings for individuals aged 55 to 64—could face an overwhelming £65,000 in taxes should this inheritance tax be enacted.

## Financial Ramifications for Pensioners

McPhail further articulates the upheaval this tax change could cause, particularly for more affluent pensioners. He stated: “The tax treatment of pension death benefits is very generous at the moment. There’s a reasonable possibility Labour will apply inheritance tax to pensions.”

He continued to detail the repercussions for those planning their legacies, explaining: “At the moment, people are using pension funds to secure their dependents’ futures. However, if inheritance tax and its avoidance become concerns, individuals may need to restructure their retirement plans. Investors will be faced with the decision to preempt any move by Labour.”

In response to this uncertainty, McPhail notes: “If it looks imminent, we might witness people withdrawing money from pension funds.”

## Expert Opinions on the Proposal

Tom Selby, a representative from brokerage firm AJ Bell, voiced his apprehensions, noting that politicians might be wary of endorsing a policy easily criticized as a “death tax.” He remarked: “Changes made by former chancellor George Osborne in April 2015 rendered pensions exceedingly tax-efficient upon death, sometimes even allowing them to be passed on tax-free,” as reported by Birmingham Live.

Selby added: “It is entirely plausible, albeit not certain, that a future government might view current provisions as overly generous and seek to increase the taxes applied to pensions on death. Should this occur, the Government would need to address how to manage those who made pension contributions or transfers based on current tax laws.”