Rachel Reeves announced in last year’s Budget that from April 2027, pension pots will be subject to Britain’s “most hated” tax.
Until recently, it was unclear whether IHT would apply if someone died before age 55 – the earliest age to access pensions.
Ian Cook, chartered financial planner at Quilter Cheviot, told The i Paper: “Charging IHT on an asset you have to accrue and are automatically enrolled into, before retirement age, is abhorrent.
“It’s a disincentive for people to save for the long term. The message to the wider public is: don’t save into your pension.”
IHT is charged on assets above the £325,000 nil-rate band, with an additional £175,000 allowance if the main residence is passed to direct descendants.
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Reeves’s changes will impose up to 40 per cent IHT on unspent private pension pots, expected to raise about £1.5bn annually for the Treasury by 2029-30.
Tom Selby, director of public policy at AJ Bell, called it “a particularly brutal hit to their beneficiaries at a time that will be extremely emotionally and financially distressing”.
He added: “Confirmation that death-in-service payments will not count towards people’s estate for IHT purposes makes this even less likely.
Death-in-service payments are lump sum payments made to a deceased employee’s beneficiaries, usually family members, by the employer when the employee dies while still employed.
Sir Steve Webb, former pensions minister and partner at LCP, accepts that Reeves’s change has to happen, but said creating an IHT exemption would create a new unfairness.
“There is already an arbitrary difference for deaths before and after 75, where income tax is due if someone passes money on for a death over 75, but inheritances are income tax-free under 75.
Caitlin Southall, director of SSAS transformation and proposition at WBR Group, called the move “unbelievably unfair”.
“By all means encourage people to use pensions for later-life saving, and not as a wealth transfer tool, but this is not the way to do it.”
The Government has been contacted for comment.
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