Stop the double tax (IHT & Income Tax) of pension funds & death benefits

The Government are introducing inheritance tax to pension funds & death benefits from April 2027. When you die this may now result in a disproportionate and unfair double taxation on beneficiaries (income tax and inheritance tax) which we think results in a disincentive to funding a pension.

We think the Government need people to take responsibility for providing income in retirement and the simplest and most effective way for the majority to achieve this is a pension. We think the tax on pensions funds & death benefits is a disincentive for most people to funding a pension. Many people want to leave their pension fund & death benefits to their chosen beneficiaries (usually children / grandchildren). We think this double taxation - income tax and inheritance tax means a lot of beneficiaries may have to pay 67% tax.

Since taking office, the Government has taken a number of difficult but necessary decisions to restore economic stability, fix the public finances, and support public services. These have been tough decisions given the situation inherited by the Government.

The decision to reform the inheritance tax rules on pensions was one of those decisions. This reform means that most unused pension funds and death benefits payable from a pension will form part of a person’s estate for inheritance tax purposes from 6 April 2027. This removes distortions resulting from changes that have been made to pensions tax policy over the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth, rather than as a way to fund retirement.

The Government will continue to incentivise pension savings for their intended purpose of funding retirement, with ongoing tax reliefs on both contributions into pensions and on the growth of funds held within a pension scheme. Pensions continue to benefit from very significant tax benefits, with gross income tax and National Insurance contributions relief costing £78.2 billion in 2023-24. It is therefore crucial to ensure that tax reliefs on pensions are being used for their intended purpose – to encourage saving for retirement and later life – rather than for passing on wealth free of inheritance tax.

These reforms also remove inconsistencies in the inheritance tax treatment of different types of pensions. Most UK registered pension schemes are discretionary, which means members are able to nominate who they would like to receive any death benefits, but the scheme trustees are not obliged to follow the member’s wishes. Under existing rules, any unused pension funds and death benefits from discretionary schemes are not subject to inheritance tax. However, there are some pension schemes, such as the NHS and judicial schemes in the UK, which are non-discretionary. Under existing rules, these are subject to inheritance tax. The reforms the Government is making remove these inconsistencies and provide equal treatment whether the scheme is discretionary or non-discretionary.