Can the Labour Party levy tax on the pension I inherited from my husband?

I inherited the pot from my late husband when he passed away at the age of 68.

I know that at this point I can take the entire pot tax free.

Now that there is a change of government, and a decision is made to levy income tax on withdrawals or to close the pot completely, do you think it is procedurally possible to implement the changes all at once or in phases for existing pots? WE

Tanya Jefferies from This is Money responds: I’m sorry to hear that you lost your husband.

We have received many questions from readers concerned that the new Labour government could introduce unfavourable tax changes before there is time to put in place protective measures.

It can be extra difficult to deal with these kinds of concerns while you’re grieving.

Of course, we don’t know what the budget will bring this autumn in terms of new pension and inheritance rules, but the government has launched a major review of pensions, which is likely to put everything on the table for longer-term consideration.

Meanwhile, Chancellor of the Exchequer Rachel Reeves is expected to announce that a post-election review has found a £20bn hole in the public finances. That hole will have to be plugged somehow.

In relation to your specific question, it is possible that stricter rules will be imposed on how pensions are inherited and taxed, but it is much less likely that pension funds already in the hands of survivors or other beneficiaries will be affected.

We asked a top financial expert to dig deeper into your situation below.

Lisa Caplan, director of financial planning at Charles Stanley, responds: Many people are currently considering whether to withdraw tax-free money from their defined contribution pension schemes, in case the new government plans to change the rules or the tax system.

Your dilemma is a variation on this theme.

Under current rules, within two years of the death of a pensioner before the age of 75, a beneficiary can withdraw the entire inherited amount tax-free up to a maximum of £1,073,100, including any tax-free money already withdrawn.

Lisa Caplan: There are almost always major changes coming into effect with the new tax year, or at least with fair warning

The other options are generally to keep the pension fund and take taxable income from it at some point, or to use it to purchase a lifelong income through an annuity.

There may be a good reason to quickly withdraw the entire amount as a lump sum. The possibility of withdrawing the entire pension value of any size is very attractive from an income tax perspective.

After the two-year period, all withdrawals are subject to income tax. This is also always the case if the pensioner dies after the age of 75.

However, it is not always obvious that it is the right decision to take all the money at the first opportunity.

When you withdraw money from your pension, it means you are leaving the pension fund in an environment where future investment growth and income is tax-free.

If your income tax rate is likely to be low in the future, you may be able to spread out withdrawals as you need them without still paying a significant amount of income tax.

But because the personal income tax exemption is currently frozen at £12,570 a year, most people will eventually have to pay tax on even small withdrawals.

Another aspect to consider is inheritance tax. Under current rules, pension pots can be passed on to your children or other beneficiaries without inheritance tax, and this can be valuable for estate planning – if it is indeed relevant to your situation.

However, it is important to note that if there are indeed changes to pension rules under Labour, this is also an area that could come into focus.

Returning to your specific question, it is not impossible that a change in the rules could have consequences for you as the holder of your deceased spouse’s pension fund.

However, it may be a bit of a moot point, as any decision to take the weed tax free is dependent on doing so within the two-year period. So, you’ll need to strategize sooner rather than later anyway.

And as for the question of whether a rule change were to be introduced overnight, as you say, and you were to be taken by surprise, that would certainly be contrary to convention.

From the new tax year onwards, major changes are almost always implemented, or you will at least be informed of them.

Any sudden change that affects existing pots from previous deaths would be draconian and highly insensitive to people like you who are struggling with financial planning while likely still in a grieving period.

Rather than making changes retrospectively, I think it would be wise if the government, if it really wants to make changes in this area, were to apply the changes from the start of a new tax year, or at the very least to pension pots that arise on death from a certain date onwards.

In short, while I can’t rule it out completely, it would be a real surprise if a rule change in this area affected you without you being able to take action.

So it is a matter of the usual planning in terms of time frame and the balance between income tax and inheritance tax.

One approach could be to withdraw and fund the full Isa contributions over a number of years, so that the tax benefits of the money are retained.

At £20,000 per tax year, this could eat up a fair chunk of most pots.

However, if the pension is higher, I would recommend that you seek regulated financial advice to help you put together a sound plan that takes into account your specific circumstances and goals, as well as any potential tax implications.