Inheritance tax raid is disastrous for pensions: attack is ‘terribly reminiscent’ of Gordon Brown who plundered dividends in 1997
Labour’s ‘bombshell’ plan to impose inheritance tax on pension pots will hit central England and leave millions in poverty, a former pensions secretary has said.
Ros Altmann says the Chancellor’s attack on sensible savers is ‘terribly reminiscent’ of the ‘fatal blow’
Gordon Brown did this when he abolished the dividend tax benefits of British pension funds in 1997.
Writing in the Mail, she warns Rachel Reeves that the new inheritance tax is ‘more like confiscation than taxation’ and could ‘destroy’ the pension system.
And the boss of City asset manager Quilter has warned the move risks ‘undermining savers’ confidence’.
In her first budget, Chancellor Reeves said that pension pots will no longer be exempt from inheritance tax (IHT) from April 2027. Currently, money left in a pension on death can usually be passed on tax-free if the deceased is under 75.
Tax coup: the current chancellor’s raid is compared to the ‘fatal blow’ delivered by Gordon Brown (pictured) when he abolished dividend tax benefits from British pension funds in 1997
But tens of thousands of grieving families now face a new death tax on their pensions, which will raise £1.5 billion a year by the end of the decade.
“The inheritance tax announcement in the Budget is a potential disaster for pensions,” Altmann told the Mail today.
‘It will mean less money coming in, more early withdrawals, lower investment by pension funds in long-term assets with higher returns and more pensioners relying on government benefits.
‘Millions are at risk of poverty later in life. The UK economy and markets will also suffer as less pension money remains invested in the long term. It’s time to wake up.’
Families can pass on up to £325,000 free of inheritance tax after their death. Couples who are married or in a civil partnership can combine their benefits to pass on £650,000.
There’s also a hefty allowance of £170,000 per person if you leave your house to your direct descendants – see the box below for more information about the rules.
Anything above that is taxed at a rate of 40 percent.
Altmann warns that Reeves’ proposed pension changes will leave many facing a form of double taxation, as the pension pots of those over 75 will be hit by both inheritance tax and income tax.
This would leave basic rate taxpayers paying a 52 per cent levy on an inherited pension fund, while higher rate taxpayers would have to pay 64 per cent or 67 per cent.
“This looks more like confiscation than taxation,” says Altmann.
Steven Levin, CEO of Quilter, said: “This feels like a retroactive tax on those who made plans based on the current rules.
The combined impact of 40 percent IHT and income tax could lead to marginal rates of 64 percent or 67 percent. This is unconscionable.
‘Changing the rules shortly after the introduction of pension freedoms threatens to undermine savers’ confidence.
‘The proposed changes will introduce significant complexity into an already overburdened system. Grieving families will face significant stress and delays in accessing assets until probate is granted.
“There are alternative ways to determine how pensions are taxed, which avoids excessive tax rates and allows beneficiaries to quickly access funds.”
The government has faced a backlash to the proposals. In a letter to the Chancellor, Michael Summersgill, CEO of AJ Bell, said: ‘If the Government goes ahead with the proposals as written, they risk fundamentally undermining the UK pension system.’