Budget 2024: Rachel Reeves announces major change to pensions that could affect retirement plans

Chancellor Rachel Reeves has stirred the pot with her latest Autumn Budget revelation, confirming pensions will soon be part of the Inheritance Tax net.

Starting from April 2027, pension savings are set to be included in the “estate” of the deceased for tax purposes. Presently, if someone passes away before reaching 75, their pension isn’t taxed when passed on.

However, if death occurs post-75, the inheritor pays Income Tax upon withdrawal, treating it like income. Hargreaves Lansdown’s retirement analysis ace, Helen Morrissey, has flagged this change as a disturbance to later-life financial strategies, anticipating it may trigger more live gifting and less untouched pension pots to dodge the taxman, reports the Mirror.

She said: “They will also look to spend down their pensions as retirement income rather than leave them untouched, a move which could keep the rest of someone’s estate below the IHT threshold. We may also see an increased interest in annuities as people look to secure a guaranteed income while also keeping their estate below the inheritance tax threshold.”

Keep up with our Autumn Budget 2024 live blog for the latest news and insights on how the changes will impact your finances.

Gary Smith, a financial planning partner and retirement specialist at wealth management firm Evelyn Partners, highlighted the pressing need for retirees and savers to revise their financial strategies, saying: “Retirees and savers have 18 months to review their long-term plans. As defined contribution pension funds could now be subject to up to 40% IHT on death, we will probably see greater withdrawals from pension pots. Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40%.”

Additionally, Rachel Reeves announced further Inheritance Tax alterations in her Budget speech. The existing Inheritance Tax thresholds are to be maintained at their current level for another two years until 20230, while updates were also given regarding taxation of business and agricultural assets.

She confirmed that the initial £1million of combined business and agricultural assets would remain exempt from Inheritance Tax; however, from April 2026 onwards, any value exceeding that amount would incur taxation, albeit with a 50% relief – effectively imposing a 20% Inheritance Tax rate on those assets.

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