Thousands of Brits could face a "triple tax raid" when a change comes into effect next spring. Unspent retirement funds will be drawn into the inheritance tax system from April 2027, potentially subjecting pensions to a levy of up to 40%.
The tax will only apply if the estate exceeds the general £325,000 tax-free allowance, supplemented by the additional £175,000 residence nil-rate band, provided it is left to direct descendants. Households could lose as much as 91% of inherited pension savings to the change, according to analysis by NFU Mutual.
How the new rules affect estates
Married couples can pool their tax-free allowances, allowing them to hand over up to £1million without incurring inheritance tax. But for estates worth over £2million, the residence nil-rate band is tapered away at £1 for each £2 over the threshold.
Once it is completely eliminated, the couple are left with just their joint £650,000 basic allowance. Before the upcoming change, the pensions would not be subject to any inheritance tax and the residence nil-rate bands would apply to the estate.
Impact on inheriting families
But the pension addition could dramatically hike the value, wiping out the residence nil-rate band completely. Those inheriting a home could be hit by yet another extra cost if a loved one dies after 75, triggering income tax on pension withdrawals.
Sean McCann, chartered financial planner at NFU Mutual, said: "The changes from April will mean some families will be hit with a triple tax blow, through a combination of inheritance tax on the pension, loss of the tax break on the family home and additional income tax if their loved one dies after age 75."
McCann added: "There are steps you can take to mitigate the impact, including ensuring you take your tax-free lump sum before age 75. While it may still be subject to inheritance tax, it will avoid an additional income tax charge."
