REVEALED: The drastic measure pensioners are taking to avoid Reeves’ death duties hike – and how much it could save YOU

Savers are increasingly withdrawing money from their pensions early to avoid a “triple tax hit” resulting from Chancellor Rachel Reeves’ proposed reforms to pension rules.

Financial advisors report that individuals are accepting significant income tax bills up to £20,000 to mitigate the impact of the changes, which include subjecting pensions to inheritance tax (IHT) from 2027.

The reforms have been criticized as “anti-aspiration” and “unfair,” as pension income has already been taxed when earned.

The “triple tax hit” includes three key measures:
1. Inheritance Tax on Pensions: Starting in 2027, pensions will be subject to IHT, meaning beneficiaries could face a 40% tax on inherited pension savings.

2. Income Tax on Inherited Pensions: Beneficiaries of those who die over 75 will pay income tax at their marginal rate when withdrawing inherited pension funds.

3. Loss of Main Residence Relief: Estates worth over £2 million will lose main residence relief at a rate of £1 for every £2 over the threshold, with the entire allowance lost for estates over £2.35 million. This could result in some families facing a 90% tax rate on inherited assets.

To avoid these penalties, savers are withdrawing larger sums from their pensions, even if it means paying higher income tax upfront.

For example, someone withdrawing £100,000 from their pension could face a £20,000 income tax bill, but this could still be more favorable than leaving the funds in the pension and incurring a larger IHT bill upon death.

Nick Nesbitt of Forvis Mazars explained that clients are now withdrawing up to £100,000 annually, accepting a 40% tax rate, rather than limiting withdrawals to £50,000 to stay within the 20% tax bracket.

This strategy can reduce the overall tax burden, especially for those in poor health who may not live long enough to withdraw their pension gradually.

Jason Hollands of Evelyn Partners emphasized the importance of considering age and health when deciding how much to withdraw.

While withdrawing larger sums can reduce IHT liabilities, it may not be the best strategy for those in good health who have more time to manage their pension withdrawals.

The Treasury has not yet commented on the situation, but the reforms have sparked significant concern among savers and financial advisors.

The rush to withdraw pension funds early highlights the growing anxiety over the potential financial impact of Reeves’ proposed changes, particularly for those with larger estates or health concerns.