Labour’s controversial plan to levy inheritance tax on pension pots has sparked widespread outrage, with critics warning it will devastate Middle England and push millions towards poverty. Former pensions minister Ros Altmann has likened the proposal to Gordon Brown’s infamous 1997 raid on pension fund dividends, describing it as a “horribly reminiscent” and “fatal blow” to prudent savers.
In an op-ed for the Daily Mail, Altmann denounced Chancellor Rachel Reeves’ plan to impose inheritance tax (IHT) on retirement pots, branding it “more like confiscation than taxation” and a policy that could “destroy” the pensions system. From April 2027, pension pots passed on after death will no longer be exempt from inheritance tax, a move expected to generate £1.5 billion annually by the end of the decade.
A “bombshell” budget announcement
Currently, pension funds left to beneficiaries are tax-free, allowing families to inherit retirement savings without additional financial burdens. Under the new rules, tens of thousands of grieving families will face a double blow: inheritance tax at 40% and income tax, leaving some paying combined rates of up to 67%.
Altmann argues this double taxation risks “millions facing later-life poverty” while simultaneously reducing pension contributions, encouraging early withdrawals, and diminishing long-term investments. “The UK economy and markets will suffer too as less pension money stays invested for the long term. It’s time to wake up,” she said.
The move has also drawn sharp criticism from the financial sector. Steven Levin, chief executive of Quilter, condemned the changes, calling them a “retrospective taxation” on savers who acted in good faith under existing rules. “The combined impact of 40% IHT and income tax could lead to marginal rates of 64% or 67%. This is unconscionable,” Levin stated.
Double taxation hits hard
The pension changes will hit those over 75 hardest, as they face both inheritance tax and income tax on retirement pots. The current IHT threshold allows individuals to pass on up to £325,000 tax-free, with couples able to combine their allowances to £650,000. Anything beyond this is taxed at 40%.
Altmann highlighted the injustice of the new system: “This is more like confiscation than taxation.” Basic-rate taxpayers inheriting pensions could face an effective tax rate of 52%, while higher-rate taxpayers could be hit with 64% or more.
Critics also note the policy’s potential impact on savers’ behaviour. Many may withdraw funds early, reducing the amount available for long-term investment. The broader economic implications include reduced pension fund investments in high-return assets, further weakening the UK economy.
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Grieving families and complex systems
Financial experts warn the policy could cause immense stress for grieving families, who will face delays in accessing funds until probate is granted. Levin added, “The proposed changes will introduce significant complexity into an already overburdened system.”
Michael Summersgill, CEO of AJ Bell, echoed these concerns in a letter to the Chancellor. He warned the changes could undermine the UK pensions system entirely: “If the Government presses ahead with the proposals as written, it will risk fundamentally undermining the UK pensions system.”
Lessons from history
The comparison to Gordon Brown’s 1997 removal of dividend tax credits from pension funds is striking. That decision wiped billions from retirement savings, leading to long-term damage to the pensions landscape. Altmann fears Labour’s inheritance tax policy could have similarly disastrous consequences.
“There are alternative ways to determine how pensions are taxed that would avoid excessive tax rates and allow beneficiaries prompt access to funds,” Levin suggested.
Public backlash
The Government’s proposals have already sparked significant backlash, with critics accusing Labour of punishing savers and families. Altmann and others urge a reconsideration of the policy before irreparable damage is done to both pensions and public confidence in the system.
As Labour faces mounting pressure, it remains to be seen whether Chancellor Reeves will revisit the policy or double down on what critics are calling an economic and social misstep of historic proportions.
