Labour could extend the scope of Inheritance Tax (IHT) to include pension pots if they win the election next month, warns the CEO of one of the world’s largest independent financial advisory and asset management organisations.
Nigel Green of deVere Group says this would trigger a “significant financial shake-up” for those with substantial retirement savings, prompting urgent reconsideration of financial strategies.
“Currently, the tax treatment of pension death benefits in the UK is exceptionally generous. Pension funds can be passed to dependents with minimal tax implications, providing a critical tool for estate planning and financial security,” he says.
The deVere CEO continues: “However, there’s growing speculation that this favourable landscape is under threat.
“Sir Keir Starmer’s Labour, say some experts, may well implement IHT on pension pots, subjecting them to the 40% IHT rate. This would represent a seismic shift in how retirement savings are managed and transferred.”
At present, many individuals use their pension funds to secure their dependents’ futures. The avoidance of IHT on these funds allows for a more substantial transfer of wealth to the next generation.
But should Labour extend IHT to pension pots, it will force many to restructure their retirement plans.
“Alternative strategies, such as increased reliance on trusts or accelerated lifetime gifting, may become necessary to minimise tax liabilities.”
The uncertainty surrounding Labour’s potential policy change may lead to pre-emptive actions to safeguard assets.
One likely scenario is the withdrawal of funds from pension accounts before any new legislation is enacted.
Such withdrawals could shift wealth into other vehicles with more favourable tax treatments.
Inheritance tax has become increasingly lucrative for the UK government in recent years. Rising property prices and frozen tax allowances have pushed a growing number of families into the 40% IHT bracket.
“This trend underscores the importance of effective estate planning to mitigate tax liabilities,” notes Nigel Green.
Labour’s proposed extension of IHT to pension pots would further increase government revenue from this tax. While this aligns with the party’s objectives of addressing economic inequalities, it also poses significant challenges for individual financial security and the broader investment landscape.
The deVere CEO concludes: “We expect a rush of enquiries from people wishing to mitigate a potential jump in their tax burden as Labour looks set for a landslide victory on July 4.”
