‘Pension death tax’ raid attacked by Hargreaves Lansdown and AJ Bell
Britain’s biggest wealth management firms have mounted a coordinated attack on Rachel Reeves’ plans to slap inheritance tax on undrawn pension pots today, describing the proposals as “flawed and potentially damaging” to grieving families.
In a letter to the Chancellor, the bosses of Hargreaves Lansdown, AJ Bell, Interactive Investor and Quilter, which collectively manage some £430bn for British savers, called on the government to u-turn on the plans announced at the Budget in October.
Under the government’s proposals, unused pension funds will be included within the value of an estate for inheritance tax purposes from April 2027. The Treasury expects the changes to bring in around £1.5bn a year by 2030.
However, the four investment chiefs claimed Reeves’ plans would hurt lower-income savers by increasing complexity and “compound an already difficult situation” for bereaved families.
“Rather than pressing ahead with this flawed and potentially damaging approach, we urge the government to reconsider these proposals and work with the pensions industry to agree a simpler method of achieving the policy aim,” they wrote.
Michael Sumersgill, the chief executive of AJ Bell, added the government’s proposals threaten to create “delay and complexity” and lead to “financial gridlock in the probate process”.
A ‘tax on death’
In their letter, the firms said alternatives could include using the income tax system to tax beneficiaries on death or reverting to a flat “tax on death” framework with a threshold that would exclude small pots.
“We understand the need for government to balance the books, but changing rules in this way adds complexity at an already stressful time,” said Dan Olley, chief executive of Hargreaves Lansdown. “People need stability in the tax system to invest for the long term. When looking to change these rules, the system shouldn’t make the experience of bereaved families worse.”
The firms warned that beneficiaries of those who die over 75 could also face “draconian double taxation via IHT and income tax”, with higher-rate taxpayers facing a marginal tax rate on inherited pensions of at least 64 per cent.
“It is unconscionable to tax remaining pension funds at levels that could remove their value almost entirely,” they said.
The charge is set to hit wealth savers who have not drawn down their full pension pot. Estates of up to £325,000 will still be inherited tax-free after the changes come in, rising to £500,000 if the estate includes a residence passed to direct descendants and £1m when a tax-free allowance is passed to a surviving spouse or civil partner.
“We continue to incentivise pensions savings for their intended purpose of funding retirement instead of them being openly used as a vehicle to transfer wealth,” a Treasury spokesperson said.
After months of fury following her tax-raiding Budget, the letter marks another blow to the Reeves. Business and consumer confidence has plummeted since October and firms have warned they will be forced to hike prices this year to counter a rise in national insurance contributions from employers.