Over 1m issued Inheritance Tax warning after Rachel Reeves makes major change

Pensioners are being warned they could face a hefty Inheritance Tax bill if they are not married after changes announced by Chancellor Rachel Reeves.

Pension experts have already slammed Reeves’ plan to introduce inheritance tax on pensions as “unworkable”.

In her maiden Budget, Reeves said any unused pension funds and death benefits will be subject to Inheritance Tax (IHT) from 6 April 2027.

But other problems with taxing pensions have emerged, and experts are concerned over the impact of the tax on death-in-service benefits.

These are a lump sum paid out to relatives as part of their pension benefits when they are in an occupational pension; an occupational pension is the pension people pay into when they are working for an employer.

As part of the pension package, employees are entitled to a lump sum ‘death in service’ benefit, which is paid out if they die while still working to any surviving relatives.

If you have a company pension you will have been asked to sign an expression of wishes form to say who you want to inherit your death-in-service benefit.

If is a couple is married then the surviving spouse will be entitled to the death-in-service benefit without it being taxed.

But if the couple are not married, even if they have been together for years and have children, then the surviving partner would, if the IHT rules Reeves hopes to bring in would mean the payment would be subject to the 40% inheritance tax rate.

In 2023, the census found that 18% of families in the UK were cohabiting couples, and there are 19.5 million families in the UK, according to the Office for National Statistics.

Pension schemes and experts have been writing to the government as part of an HMRC consultation before the introduction of IHT on pensions.

Pensions consultancy Broadstone said it was concerned.

Broadstone head of policy, David Brooks, told Money Marketing the death-in-service benefit lump sums should continue to be free from inheritance tax.

He said: “It is understandable that the government is reforming the inheritance tax regime to ensure pensions are used for their primary purpose of providing income in retirement rather than enabling wealth transfer.

“However, we believe there are a few elements of the proposals that could be loosened, particularly where the primary purpose of lump sum payments is not for estate management.

“We are also concerned about the impact on “common law” partners who could also be treated unfairly compared to the current tax situation on death and we would urge the government to consider updating the IHT tax system for the living circumstances of society.”