Labour’s “pensions death tax” will be “disastrous” for Britain and leave elderly people dependent on the state, experts have warned.
There is horror at the Government’s Budget decision to end the inheritance tax exemption for unused pension pots.
It is feared people will spend their pension cash early to avoid a tax raid by the Treasury when they pass away.
By underestimating their life expectancy they could end up with little to live on in their old age.
Former pensions minister Baroness Altmann warned: “The incentive now – without any shadow of a doubt – is to spend your pension money as soon as you can.”
She said Labour’s decision smacked of the “politics of envy”, adding: “It’s short-sighted ideologically-driven policymaking that will have, I believe, damaging consequences for the economy and for individuals.”
Under present rules, inheritance tax of 40 per cent is paid on a deceased person’s assets above the £325,000 threshold. Money saved in a pension does not count towards this – but that will change from April 2027.
Baroness Altmann said: “You’ve got a pension death tax now.”
John O’Connell, chief executive of the TaxPayers’ Alliance, said: “It will absolutely shock taxpayers to their core that the Chancellor has decided to find ways to extend rather than trim back the detested death tax.
“Families have long been able to find ways to avoid some of this cruel and capricious levy, limiting the damage.
“But with changes to rules particularly on pensions this will become harder to do. The Chancellor should quickly u-turn on this nasty policy and stop her relentless assault on pensioners.”
The Government estimates 10,500 estates that would have been exempt will have to pay inheritance tax as a result of the changes, with around 38,500 estates paying more of this tax than under the present system.
Maxwell Marlow, of the Adam Smith Institute, warned: “Inheritance tax is already a pernicious tax, preventing Brits from doing the most natural thing in the world – leaving their children better off than they were. Removing exemptions – including those on pensions – will only make it more so.
“This will damage pensioners’ ability to plan for their future, and they will likely spend their pensions earlier on in their lives, meaning that they may end up being reliant on the state pension.
“And if more pension cash is being withdrawn from pension funds at a faster rate, less money will be invested into productive and growing companies.
“The Government is making a mistake – they should reverse these disastrous changes. In fact, the best and boldest move they could make would be to abolish this death tax altogether.”
Former pensions minister Guy Operman said: “This inheritance tax change has big consequences for pensioners and the working population.
“Firstly, the concern is that people will save less, and spend their pensions early, both of which are unwise.
“Secondly, middle and high income earners will definitely conclude the tax system is making work and saving untenable and they will retire early or move abroad.
“The key issue with this is that these are the sort of people the Chancellor needs to drive forward growth.”
Baroness Altmann said: “The worst thing you can do in pensions as a politician is meddle and tinker and change things like this, and that’s what they’ve done. It’s a real shame.”
The Government argues the changes will deter people who are trying to use pensions to pass on wealth free of inheritance tax.
A Treasury spokesperson said: “We are committed to supporting pensioners with our triple lock promise meaning State Pensions will increase by over £470 per year. There is still significant tax relief available so pensioners can have financial security in retirement and pension funds left to a spouse or civil partner will not be subject to inheritance tax.
“We are fixing the foundations of the tax system to ensure pensions fulfil their purpose of funding retirement, rather than being used to avoid tax.”
Support for the Government’s position came from the Resolution Foundation.
Molly Broome, an economist with the think tank, said: “Making pensions tax exempt created a perverse incentive to use pensions as a tax planning vehicle for the transfer of wealth – at a time of widening wealth inequality – rather than their original purpose of funding retirement.”
The outrage at the tax on pension pots comes on the heels of fury that the Government has stopped winter fuel payments for all but the poorest pensioners. There is disappointment the cut was not reversed in the Budget.
Rhian Bowen-Davies, the Older People’s Commissioner for Wales, said: “This decision will result in hundreds of thousands of older people missing out on crucial financial support, and many older people have told me they are hugely worried about the effect this will have on their health and well-being.”
