In a move that could significantly impact pension pots across the UK, Chancellor Rachel Reeves is facing calls to overhaul inheritance tax (IHT) rules.

The Institute for Fiscal Studies (IFS) has proposed that unspent cash in defined contribution pension funds should no longer be exempt from IHT, potentially raising up to £2 billion annually.

This recommendation aims to align the UK with recent suggestions from the International Monetary Fund (IMF) regarding fiscal policy.

Amid pressures to meet public spending targets, the IFS argues that taxing unspent pension wealth could address current economic challenges.

With income tax, VAT, and corporation tax hikes off the table, speculation is rife that Ms. Reeves might target pensions or capital gains tax to bolster government revenues.

David Sturrock from the IFS highlighted concerns that the current tax treatment incentivizes holding onto pension wealth rather than using it for retirement expenses.

This, he argues, creates a situation where pension pots are increasingly used for building inheritances, rather than funding retirement itself.

Revenue Projections and Potential Concerns

Initially, the proposed changes are expected to generate around £200 million annually, but could grow to between £1 billion and £2 billion over the next decade.

However, there are fears that such reforms could result in double taxation, particularly for heirs withdrawing funds after the pension holder’s death.

Former officials and economists have weighed in, with some supporting the overhaul as a necessary adjustment to modernize tax policies.

Critics, including former pensions minister Ros Altmann, have described the potential reform as a “travesty,” arguing it undermines incentives for prudent retirement planning.

Government Response and Future Outlook

In response to these proposals, Ms. Reeves acknowledged the economic challenges but emphasized the government’s commitment to laying a stable economic foundation. The Treasury, while acknowledging the need for economic stability, hinted that any tax changes would be announced in the”

On a broader scale, the IMF’s recent economic forecasts suggest challenges ahead for the UK, with modest growth projections amidst global economic uncertainties and persistent inflationary pressures.

The IMF has urged governments, including the UK, to adhere to fiscal discipline despite these challenges.

In conclusion, while proposals to reform inheritance tax on pension pots aim to shore up government finances, they also raise significant concerns about fairness and economic impact.

The debate over these potential reforms is likely to intensify as the government prepares for its next fiscal decisions later this year.

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