Soon-to-be-ex-Chancellor Rachel Reeves faces the axe as Andy Burnham prepares to replace her, but her pension tax legacy will haunt families for years. From April 6, 2027, unused defined contribution pension pots will be added to estates and may become liable for inheritance tax (IHT) at 40%, a change pension experts call a "nightmare" that will trap grieving families in bureaucracy.
New IHT rules on pensions spark outrage
Until now, defined contribution pensions could be inherited free of IHT. Reeves has torn up the rulebook. From next April, many ordinary families could face a 40% IHT bill on any unused pot. If somebody dies after 75, beneficiaries may also have to pay income tax on withdrawals. Former pensions minister Baroness Ros Altmann warned: "The proposals are a nightmare, are too complex and place unrealistic demands on those responsible for administering estates."
Executors face impossible task
Altmann questioned how executors will calculate tax on pension pots they may not even know exist. "This policy is fraught with dangers. How on earth can people actually do this if they don't know anything about pensions?" She called it a betrayal of savers who were encouraged to build pension savings because they sat outside IHT. "You cannot encourage people to build pension wealth for later life and then penalise them after they do."
Early withdrawals and care risks
Altmann fears people will start emptying pension pots early to avoid future tax, undermining retirement saving and leaving them short of funds if they need social care. Lawyers are equally alarmed. Sarah Conner, partner at Hodge Jones & Allen, warned: "Levying IHT on unused pensions is going to cause chaos for executors when dealing with a deceased estate, as they will be responsible for paying IHT on pensions they do not control."
Six-month deadline and 67% tax rate
Executors have only six months to find all pensions and pay the IHT bill. Conner warned the burden could become so great that people refuse to act as executors. Some estates could suffer a tax rate as high as 67%. Naomi Neville, estate planning specialist at Irwin Mitchell, urged families to act now: "Develop a clear picture of pension holdings, review beneficiary nominations and ensure pension arrangements are aligned with wills."
Legacy of chaos
Reeves may soon leave Number 11, but the mess will live on. Families cannot wait for Andy Burnham to scrap the plans. They need to track down every pension, update beneficiary nominations, make sure wills and pension paperwork match, and tell executors where everything is kept. The risk is that Burnham's pick as next chancellor will be even worse. It's another disastrous legacy from Rachel Reeves that grieving families will shoulder for years or decades.
