UK households face having to pay £34,000 to HMRC unless they act

UK households have been issued a warning over using their pension more effectively ahead of a inheritance tax raid from the new Labour Party government. A further 38,500 estates are expected to pay an average of £34,000 more due to the inclusion of pension assets.

Gary Smith, financial planning expert at Evelyn Partners, said: “More families will be drawn into the web of inheritance tax from 2027, and some of those will need to start planning now if they want to mitigate the effects.”

Mr Smith explained: “The prospect of pension funds being taxed twice, if beneficiaries also have to pay income tax on withdrawals, is one that most savers will want to avoid. Also, if the addition of pension savings will push the total value of an estate over the £2million mark, then the residence nil rate band will start to disappear, and IHT bills will become even more onerous.”

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He said: “One possible reaction to suddenly finding that a whole chunk of money that was previously immune to IHT will now be added to the estate is to start giving it away during lifetime or spending it.”

Mr Smith added: “The important thing is not to take drastic decisions and not to be blinded by the tax question. Are you realising losses on investments at a dip in the market to make a big pension withdrawal? Are you leaving yourself sufficient funds in your pension for the rest of your retirement and possibly care costs?”

“Even within the tax question, could you be paying a higher rate of income tax by increasing withdrawals for gifting, which could wipe out any eventual IHT saving? This is obviously a danger if the pension withdrawals are subject to the higher 40% or 45% marginal rates of income tax," he said.

“The extra funding will result in an extra gain in tax relief, and that is likely to be more beneficial to them than leaving assets at death that could be taxed not just once but twice," he went on, adding: "The IHT rule change will transform the way some savers think about their pensions and funding retirement.”