Inflation Puts Pensions at Risk of 'Shrinking' – an effective 90% Tax on Inherited Pension Funds?
- TBA
- Mar 12
- 3 min read
Updated: Mar 13
"With inflation so high, will my pension be enough when I retire?"
"Do I really have to pay 90% tax on my parents’ inherited pension?"
Even though some time has passed since the Labour Party released its first Autumn Budget, the financial measures included continue to spark heated discussions online—especially the pension policies.
The New Pension Policy Could Trigger a Chain Reaction
Since Rachel Reeves announced the end of the inheritance tax exemption for pensions starting from April 2027, the policy has led to strong reactions from different groups, with predictions of potential ripple effects.
1. High Taxes on Inherited Pensions
Previously, pensions were considered a tax-efficient way to save. However, from April 2027, pensions will be included in the calculation of estate value and will be subject to a 40% inheritance tax. Estimates suggest that this policy change will cost grieving families an additional £65,000 on average.
Additionally, it may discourage people from saving into their pension accounts due to concerns over taxation. Experts warn that beneficiaries of those who pass away after the age of 75 may face a combination of inheritance tax and income tax.
This means that, in some cases, high-rate taxpayers inheriting a pension could face a marginal tax rate of up to 90%.
2. Complex Tax Calculations for Pensions
Pension providers have raised concerns over the Chancellor’s plan, noting that the tax calculation process is highly complicated. This could pose an ongoing administrative challenge for pension managers.
How Can You Increase Your Pension Income?
In recent years, inflation has driven up the cost of living significantly, yet pension amounts have not increased proportionally. The rising cost of retirement means that more people are struggling to meet their financial needs. The average pension shortfall—the gap between what you have and what you need for a moderate retirement income—has grown to £31,546, four times the figure in 2019.
Simply put, the amount of money that once bought a whole loaf of bread now buys only a quarter of one.
So, how can you boost your pension income? Here are a few strategies to consider:
1. Increase Your Pension Contributions
If you receive a pay rise or switch jobs, consider increasing your pension contributions. This will have a significant impact on your final pension amount. You can also discuss with your employer whether they are willing to increase their contributions to your pension fund.
2. Locate Your Lost Pensions
When planning for retirement, reviewing pensions from previous employers is crucial. Frequent job changes and house moves make it easy to lose track of old pension accounts.
According to the Pensions Policy Institute, over 3 million pension accounts in the UK are currently unclaimed. Recovering these lost pensions could significantly improve your retirement security.
If you suspect that you have lost a pension, you can contact the government’s Pension Tracing Service. By providing your employer’s or pension provider’s name, the service can help you locate and retrieve your pension funds.
Once you find your lost pensions, you may consider consolidating them for easier management. Combining pensions can help streamline tracking and planning. However, before making this decision, ensure that consolidation does not result in high exit fees or the loss of valuable benefits.
3. Plan Your Pension Carefully
Once you have a clear understanding of all your pension assets, you can estimate your retirement income in advance. Regular reviews will help you stay on track towards your ideal retirement lifestyle. If any issues arise, early planning gives you time to adjust your strategy accordingly.
On a broader scale, the government is currently reviewing pension policies to explore ways to provide better retirement security for the public.
The goal is to reduce the number of lost pensions and address the increasing number of small pension pots, ensuring that every pound of pension savings reaches its intended recipient without being overlooked or wasted.
If you find pension rules confusing or need assistance with pension tax planning, don’t worry!
At TB Accountants, our team of professional tax experts is here to provide free one-on-one financial and tax consultation, helping you navigate the complexities of pension regulations and develop a tailored tax strategy to safeguard your wealth.