Inheritance Tax: Pensions

Baroness Altmann Excerpts

Monday 17th November 2025 Lords Chamber

Asked by

[Baroness Altmann]

To ask His Majesty’s Government what assessment they have made of the impact on bereaved families, confidence in pensions and future levels of pensioner poverty of proposals to impose inheritance tax retrospectively on unused pensions and death benefits.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, the Government continue to incentivise pension savings for their intended purpose of funding retirement. Most unused pension funds and death benefits payable from a pension will form part of a person’s estate for inheritance tax purposes from 6 April 2027. This removes distortions resulting from changes made over the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth, rather than to fund retirement.

[Baroness Altmann (Non-Afl)]

I thank the Minister for his Answer, but my Question was whether the Government have actually properly considered the real-world impact of these unworkable proposals. With its aim to hit the minority of wealthy pension owners, this policy could actually damage millions of less well-off families who will see a 40% cut in death benefits, especially if they are in a defined contribution scheme, much less so in defined benefit. A single parent with a house and children will lose out significantly. Does the noble Lord recognise that this retrospective confiscation without transitional protection undermines confidence in long-term planning, reduces long-term investment and will lead to more people rushing to take money out of their pensions quickly, just in case they may face the inheritance tax? This is especially the case if they can take out thousands of pounds a year at just 20%, which will mean more pensioners in future in poverty, despite the Government’s aim to get more people saving for a good pension.

[Lord Livermore (Lab)]

I am grateful to the noble Baroness for her question; I think the short answer is no. Let us be very clear: this is not a retrospective policy change. It takes effect for deaths on or after 6 April 2027, so that is in no way retrospective. As for the examples that the noble Baroness gives, it is important to be very clear that estates will continue to benefit from all the normal nil-rate bands, reliefs and exemptions available. An estate can pass on up to £1 million with no inheritance tax, and spouses are fully exempt from inheritance tax. More than 90% of UK estates will continue to have no inheritance tax liability following these changes.

--- Later in debate ---

[Lord Livermore (Lab)]

As I say, given that all the normal nil-rate bands will continue to apply, an estate can pass on up to £1 million with no inheritance tax. If you are leaving £1 million, you probably have the cash to pay the tax.

[Baroness Altmann (Non-Afl)]

My Lords, I fully agree with the noble Lord that pension funds should be used to fund retirement. The point is that this is a retrospective tax, because people have already put the money in and made long-term plans, of which now a significant proportion, and sometimes the majority, is being confiscated by HMRC if they are unlucky enough to die before they draw down. The worry is about people who are younger, not those who are deliberately avoiding taking their pensions. People die unexpectedly young, and their families will lose out and their death benefits will be cut. These are people who have made long-term plans. I am concerned about the impact on future pension savers, who will think, “The Government might just come and take this money away from me. I’m not going to invest it for the long run—pensions is just not something I want to bother with”, even if they would not eventually pay IHT. That is the problem and why I was suggesting a flat-rate levy, which can recover some of the tax relief given on unused pensions but still not impact the future confidence in pensions.

[Lord Livermore (Lab)]

All the points that the noble Baroness raises have been covered in previous conversations. It is clearly not a retrospective tax because it takes effect for deaths on or after 6 April 2027. I have also dealt with the fact that a flat-rate tax would mean that 90% pay more so that 10% can pay less, and that an estate can pass on up to £1 million with no inheritance tax due.