Government’s Proposed Pension Tax Changes Could Change Family Inheritance Plans

Should you be concerned about a new policy that might disrupt your family’s long-term inheritance plans? Financial advisers think so, according to the Daily Mail.

The current legislation enables beneficiaries to inherit pensions without any tax burden if the account holder passed away before their 75th birthday. They only need to pay income tax if the account holder had reached or exceeded this age.

In a surprising twist, the Treasury now plans to investigate whether to impose income tax on withdrawals from inherited pensions, even those received from younger individuals. Yet beneficiaries could still circumvent this tax if they decide to accept the pension in the form of a one-time lump sum.

The Potential Impact of the New Tax Regime

Experts fear these sudden changes may spark confusion and disrupt the financial plans of many who plan to transfer their pension wealth to the next generation. Such a dramatic shift in policy could impact those with their money in drawdown schemes particularly hard. Some critics argue that these changes could unfairly penalise many people, primarily those who have transferred their assets out of final salary pension schemes. The pension freedom reforms in 2015 stimulated this move, as these schemes only offer benefits to surviving spouses, leaving children excluded.

The reaction amongst industry professionals has been rather mixed. According to a study by Standard Life involving 200 financial advisers, only 11% endorsed the reforms. A notable 39% objected, 16% couldn’t decide, and the remaining 34% remained neutral.

Nevertheless, an incredible 92% agreed that these new tax rules would significantly affect their clients’ financial strategies. Furthermore, 73% recommended their introduction should be postponed beyond the next election. According to critics, the adverse effects of these changes would include:

  • Compelling pension holders to cash in their tax-free lump sum prematurely than they typically would.
  • Undermining the financial plans that people made based on assumptions regarding current death benefits.
  • Eroding faith in the country’s savings system.

The Risks and Rewards of New Tax Changes

Supporters, however, argue that these new rules would:

  • Equalise the tax treatment, regardless of the account holder’s age at their time of death.
  • Encourage individuals to perceive their retirement funds as a source of income rather than an asset to bequeath to their loved ones.

Critics caution that these stipulations would foster anomalies that could create poor financial decisions. If beneficiaries choose to take a lump sum to avoid tax instead of regular income from an inherited pension pot or withdraw their pensions early to disregard their loved ones paying income tax, the outcome could be detrimental.

Also worth noting is modifications to the lifetime allowance, a cap, standing at £1,073,100, on the total amount one can accumulate in their pension pot before tax penalties kick in. The government scrapped the old charges for breaching this limit on 6 April, though the legislation will only modify in April 2024. Notably, the Labour party has pledged to reinstate the lifetime allowance if it emerges victorious in the next election.

The Effect on the Pension Industry

Chris Hudson, the retail advised managing director at Standard Life, reflected on this potential upheaval, stating that the past year had already witnessed a series of unpredicted changes to the pension rules. As a result, many clients were left seeking advice on their financial and future planning. Hudson expressed his firm’s apprehension of further shifts, particularly regarding pension inheritance tax rules, believing such moves might badly affect their clients’ plans. He warned of a possible “customer detriment” without adequate planning, and the volatile measures around lifetime allowance could cause further confusion and uncertainty if the ruling party loses power and the legislation is reversed.


In light of these ramifications, it is evident that the proposed changes to pension inheritance rules could significantly affect many UK citizens’ future financial plans. While the government’s intention to harmonise tax treatment is understandable, the lack of clarity and the unexpectedness of these changes have caused apprehension and anger among industry professionals and pension holders alike. It will be crucial to keep an eye on the evolution of this debate in the coming months.

As always, if you’re concerned about how these changes might impact your pension plans, seek advice from a financial advisor who can make sure you’re fully prepared for whatever changes might be ahead.