Inheritance tax to apply to pension pots

The plan would tax pension pots even if savers die before retirement, as Labour seeks to fill a budget shortfall.

Inheritance tax will apply to pension pots even if workers die before retirement

The government is moving to tax pension pots even if the saver dies before reaching retirement age, a policy described as part of a broader effort to repair public finances. Officials say the tax could apply to pension pots that are passed on to beneficiaries, potentially at a rate up to 40 percent, though HMRC has not confirmed every detail. The policy, first outlined last year, would take effect from April 2027 and is framed as a way to broaden the tax base. Critics warn the change could alter retirement planning and affect middle income savers who have built up pension wealth over years. At the same time, Labour figures have floated the idea of a lifetime cap on gifts, a proposal that could magnify the political debate around tax and inheritance. The Treasury says it remains focused on keeping taxes for working people low while addressing the budget gap, and officials emphasise that any reform would be designed to be fair and transparent.

The proposal tests a central question in modern fiscal policy: how far the state should go to fund services without crushing incentives to save. Extending inheritance tax to pension pots shifts risk from wealthier estates to everyday savers who may not yet feel comfortable with their retirement plans. It also raises questions about fairness, especially if the policy interacts with gifts or lifetime transfers. Politically, the plan puts Labour under pressure from critics who see it as targeted taxation of middle-class savers, even as the party seeks to reassure voters about public finances. The outcome will hinge on how the government balances revenue needs with the real effect on retirement security and public confidence in tax policy.

Highlights

The question is not whether to tax more, but how to tax fairly and clearly.