The Chancellor’s attack on pensions could cost you £33,000. In our Beat The Budget special you can read what you can do about it

It is undoubtedly one of the standout attacks of the budget. Pension savers have been dealt a surprising blow as they face a new death tax.

Suddenly, families will have to rethink their estate plans because from April 6, 2027, they will have to pay inheritance tax at a rate of 40pc.

But what does this mean? Here we look at how much the new tax action could cost you and what you can do to protect your pension.

What exactly is changing?

Private pension funds and company pension funds have not yet formed part of your estate and are therefore not liable for inheritance tax.

This meant that the money left in your pension at your death could be passed on free of inheritance tax, making it a tax benefit.

efficient way to leave money to the next generation.

However, Ms Reeves announced yesterday that pensions would no longer be exempt from 2027.

Any unused pension savings will be added to the value of your estate and may result in a tax bill.

Individuals can pass on up to £325,000 free of inheritance tax after death – known as the nil rate band. Couples who are married or in a civil partnership can combine their benefits to pass on £650,000.

Anything above this amount is taxed at a rate of 40pc. An additional allowance applies for reporting properties (see reverse side).

John Chew, tax and estate planning specialist at pension group Canada Life, says this will ensure inheritance taxes are no longer just paid by the wealthy. Middle-income families will also end up in the net.

He says: ‘This year about 5 pc. of households are subject to inheritance tax. As a result of the changes announced in today’s Budget, this figure is expected to almost double by 2030.

‘Pre-Budget, for example, beneficiaries of someone with assets worth £300,000 and a pension pot of £107,300 (the average pension pot for a 55 to 64 year old, according to the Office for National Statistics) would not have done this. was subject to inheritance tax.

‘However, now they are looking at a bill of just under £33,000.’

Which pensions are affected?

The new death tax will largely apply to those in the private sector who have saved in modern defined contribution pensions.

Most employees nowadays save in these pensions and build up a pot of money that they can draw from after retirement.

Currently, any money left over after death can be passed on to loved ones without estate taxes. But in April 2027 this will change.

The reform will not apply to public sector defined benefit pensions, which guarantee workers an income after retirement. These pensions usually die with the saver.

Some public sector workers who have chosen to take a lump sum of cash from their defined benefit pension and put it into a defined contribution pension will find themselves in the tax net.

Will my spouse pay IHT on my pension?

No. All assets left to the spouse or registered partner are exempt from inheritance tax.

Is my pension secured?

When major pension reforms have been introduced in the past, previous governments are known to have offered protections to savers to safeguard the money already built up in a pension.

The Chancellor did not indicate in her budget yesterday that there would be such protections, but the fact the change won’t come into effect until 2027 suggests the details still need to be worked out, says Tom Selby, director of public policy at stockbroker A. J. Bell. .

He said: ‘As is often the case with pensions, the application of a new death tax will present significant challenges, which is why the changes will not be implemented until 2027.

‘A major obstacle revolves around how to treat people who have made decisions about their pension pot based on the death tax rules as they currently stand.

‘For example, there will be people who choose to transfer defined benefit pensions to a defined contribution scheme, partly because they want to prioritize the efficient transfer of tax money to their loved ones.

‘Anyone who has made larger contributions to their defined contribution pension to make optimal use of the existing rules will now also wonder what could happen to their pot if they die.

“If that money were suddenly subject to a new death tax on pensions, those people would understandably feel like the rug was being pulled out from under them.”

What can I do to get around it?

The government’s official forecasting body expects that many families will take preventive action to protect their pension savings from this new tax grab.

There are several tricks that pension savers expect to use to shield £2.2 billion from the tax authorities in the first three years after its introduction.

This involves withdrawing larger amounts from pensions to send the money to accounts and assets that are exempt from inheritance tax.

Savers can still withdraw 25% of their pension assets tax-free and this money can then be invested or donated elsewhere during your lifetime.

You can make any number of cash gifts as long as you survive them at least seven years after making them, as they will then fall outside your estate.

Baroness Ros Altmann, former Pensions Minister, said: ‘Pensioners will be encouraged to spend their pensions while they are still relatively young, leaving much less to live on if they survive into old age.

‘Most people underestimate their life expectancy, meaning they are likely to have spent their pension well before they reach their much later years, potentially leaving them with less to live on than they would otherwise have and less money to spend on elderly care.’

Is it worth saving for a pension?

Pensions remain a tax-efficient way to save for later life.

Any money saved in a pension pot still provides tax relief at the employee’s marginal income tax rate, and 25pc. of the final pension pot can still be withdrawn tax-free. Employees who save for a pension receive employer contributions in addition to their savings.

However, Myron Jobson, of stockbroker Interactive Investor, says the appeal of pensions could be “somewhat blunted” by the new inheritance tax.

Savers may need to weigh up their savings with a pension account versus other tax-efficient accounts, such as Isas, which offer more flexibility for those who need access to the money early.

Anything else to watch out for?

Mark Levitt, partner at tax firm Blick Rothenberg, warns that those who inherit a pension could now face a double tax burden on that money.

This is because loved ones have to pay income tax at their marginal rate on any money they draw from an inherited pension.

Currently, you have to pay income tax if you inherit a private pension from someone who has died at the age of 75 or older.

If they are under 75 years old, no tax is charged. But from 2027, both income tax and inheritance tax could be levied.

A higher rate taxpayer who inherits a pension worth £80,000 as part of an estate that exceeds the nil rate would face an inheritance tax bill of £20,181.82 on the pension, Mr Levitt says.

However, they would also face a 40 per cent tax bill on any money they withdraw from the pension, meaning they would have to withdraw £33,636.37 to pay the inheritance tax bill.