The Government is poised to rake in an astonishing £40bn over the next two decades as pension savings are pulled into the inheritance tax (IHT) net, experts have warned.
New analysis from pensions consultancy LCP has revealed that the move to tax unused pension savings as part of an estate from April 2027 will deliver a multi-billion-pound windfall, dwarfing previous estimates.
Labour originally suggested the tax raid would raise £640m in its first year, rising to £1.46bn annually by 2029/30.But LCP’s latest projections suggest that figure could soar past £3bn per year in the 2030s, with the total take exceeding £40bn over 20 years.
The explosive growth in pension transfers following the 2015 pension freedoms is the key driver behind this unprecedented tax grab.
Between 2015 and 2018, more than 170,000 people moved their defined benefit (DB) pensions into defined contribution (DC) schemes, with six-figure transfer values becoming the norm. Many did so with the explicit aim of passing on their wealth tax-free.
Labour originally suggested the tax raid would raise £640m in its first year (Image: Getty)
The peak of this frenzy came in 2017-18, after which stricter financial advice rules and a fall in transfer values cooled the trend.
But those who made the move are now in their mid-60s, and as they pass away over the coming decades, their untouched pension pots will face the full force of IHT.
Tim Camfield, senior consultant at LCP, described the shift as a “gold mine” for the Treasury, warning that “the surge in DB pension transfers in the late 2010s will dramatically increase the number of people whose estate includes a significant DC pension balance.”
Under current rules, unused pension savings are usually passed on tax-free at the discretion of trustees. But from April 2027, any remaining pension balance will be taxed as part of an estate if it exceeds the IHT threshold.
The tax is charged at a staggering 40% on estates over:
£325,000 for most estates
£500,000 if passing a home to direct descendants (when the estate is under £2m)
Estimates from the Office for Budget Responsibility (OBR) suggest that 66,600 estates will be hit with IHT in 2029-30, up from 40,100 in the current tax year.
A Freedom of Information request by investment platform Interactive Investor suggests that 31,200 more estates will be subject to IHT in the three years from 2027-28 due to the pension changes alone.
With the Government set to cash in, many retirees may look to sidestep the tax by drawing down their pensions faster or gifting their wealth before they die. But even this strategy could prove costly, as pension withdrawals are still subject to income tax.
Shaun Moore, tax and financial planning expert at Quilter, told the FT that a freeze in the IHT threshold until 2030 will only “cash in on an ever-expanding pool of taxpayers.”
The IHT threshold has remained at £325,000 since 2009, meaning that inflation and rising asset values have steadily dragged more people into the death tax trap.
Rob Morgan, chief analyst at Charles Stanley, added that enhanced death benefits were often a major factor for those transferring DB pensions to DC schemes, meaning that “many estates will now be caught in the IHT net.”
Despite the eye-watering forecasts, the Treasury has pushed back against LCP’s projections. A spokesperson said: “We do not recognise these figures. Government costings are based on actual inheritance tax data and are certified by the independent Office for Budget Responsibility who forecast over a five-year period.”
One thing is clear: from 2027, thousands of families will be in for a shock as their loved ones’ hard-earned pension savings are swept into the inheritance tax net. And for the Government, it will mean billions more in tax revenue for decades to come.