The Chancellor’s decision to bring pensions into the inheritance tax (IHT) net has sparked alarm among savers, with billions already withdrawn from retirement pots ahead of the change.
Under plans set out by Rachel Reeves in the Autumn 2024 Budget, from April 6, 2027 most unused funds from defined contribution pensions will be treated as part of an estate for IHT purposes — ending the long-standing exemption that allowed families to inherit pension wealth tax-free.
The government says the reform is aimed at stopping pensions being used as “tax-avoidance vehicles” and ensuring they fund retirement rather than wealth transfer. Spouses and civil partners will remain exempt, while death-in-service payments will not be taxed. Officials also promised safeguards to prevent “double taxation” when both IHT and income tax apply.
The announcement has already triggered dramatic consequences. HMRC data shows more than £18 billion was withdrawn from pension pots in the year to March 2025, as savers rushed to beat the looming changes. Many feared the new tax charge, while speculation — later dismissed — that the 25% tax-free lump sum could be reduced added fuel to the exodus.
Financial experts have warned the withdrawals could undermine retirement security, leaving older people short of money in later life. Others predict a cultural shift, with savers spending or gifting wealth in their lifetime rather than passing it on.
Industry bodies have raised concerns about the added administrative burden for estates, while economists warn of potential market volatility. Pressure is now mounting on the Treasury to revisit the reforms before they take effect in 2027.
