Martin Lewis Sounds Alarm on New Pension Inheritance Tax
Consumer champion Martin Lewis has issued a stark warning regarding a significant new tax change affecting pensions, describing it as a "massive" shift in the financial landscape. The change, which will see pensions brought into the inheritance tax regime from April 2027, was announced by Chancellor Rachel Reeves in the Autumn Budget 2024. Lewis emphasised that individuals, particularly those approaching or over the age of 75, should consider reviewing their financial plans immediately to understand the potential implications.
The 'Double Taxation' Threat for Older Pensioners
During a recent episode of his BBC podcast focused on inheritance tax, Lewis was joined by financial specialists who detailed the forthcoming regulations. Lucie Spencer, a financial planning partner at wealth management group Evelyn Partners, highlighted a critical concern: a "double taxation" rule for those aged 75 and above. Under the new rules, which apply to unused defined contribution pension schemes, if the deceased was 75 or older, the beneficiary receiving the pension will be subject to income tax on the sum, in addition to the inheritance tax liability.
Spencer explained: "For years, I've been working with clients who were spending down their ISA allowances and general investment accounts. Now we're revisiting that planning, especially for those over 75 because of that double taxation rule." This has led to a noticeable shift in client behaviour, with many now drawing more income to gift away from their regular earnings, as gifts from surplus income that do not affect living standards remain inheritance tax-free.
Unanswered Questions and Practical Complications
Despite the looming implementation date, experts caution that several key details about how the tax will operate remain unclear. Hannah Martin, a pensions expert and founder of Rich Retiree, pointed out that guidance is still needed on multiple fronts. She raised questions about who will be responsible for reporting and paying the tax, how situations with multiple pensions will be handled, and how allowances can be allocated between pension and non-pension assets.
Martin also highlighted potential timing issues, noting that inheritance tax in the UK must typically be paid within six months of death to avoid interest charges. "This puts pressure on executors to ascertain the value of the pension quickly," she said. "And what happens if they can't access the pension money to pay the tax?" Further complications could arise in valuing various pension benefits, such as lump-sum death benefits from defined benefit schemes, guaranteed annuity payments, drawdown funds in payment, and joint-life annuities.
Proactive Steps and Financial Planning
Lewis underscored that the inclusion of pensions in inheritance tax represents a fundamental change, as many people had previously viewed pensions as a tax-efficient way to pass on assets. "This is a massive change coming," he stated. "In many ways, because pensions weren't in the inheritance tax regime, many people were operating that they would leave their money in their pensions, because it was a good way of passing assets inheritance tax-free."
With the new rules set to take effect in just over a year, financial advisors are urging clients to engage in proactive planning. This includes reviewing pension drawdown strategies, considering gifting options from regular income, and staying informed as more details emerge from HMRC. The consensus among experts is that early action and thorough financial reviews are essential to navigate this impending tax shift effectively.
