Rachel Reeves’ death tax could take more pension money | Personal Finance | Finance

Former Pensions Minister Steve Webb says the Government Is set for a multi-billion pound windfalls as pensioners spend to dodge a new inheritance tax trap.

While the tractors circling Parliament Square made for great television, Mr Webb says the real inheritance tax sting lies not in the fields of rural Britain — but in the untouched pension pots of middle England.

“While the inheritance tax changes for farmers have grabbed most of the media attention, it is the IHT changes relating to pensions which will affect far more people and raise far more money.” he said.

And it’s already happening. Across the country, pensioners are pulling money out of their retirement pots earlier than planned — not to pass on to their children, but to spend.

“The newspapers are full of people who have reacted by taking money out of their pensions much earlier than planned,” Webb noted. “They’re spending it on multi-generational family holidays — or even the famous sports car.”

From April 2027, unspent defined contribution (DC) pensions will be swept into estates for inheritance tax purposes, dragging potentially thousands more families over the £325,000 threshold and slapping them with a 40% tax bill.

The Treasury estimates this will raise £1.46 billion annually by 2029 — but Webb is sceptical. “I think the government has substantially under-estimated the revenue they are likely to generate through this policy,” he warned. “Just at a time when we are constantly reading of the chancellor’s limited fiscal ‘headroom’, I have no doubt that income tax and VAT revenues will surprise on the upside.”

That’s because every time a pensioner takes money out of their pension wrapper to spend — whether it’s on a trip to the Maldives or a brand-new Aston Martin — it triggers an income tax charge. And that spending often brings with it a VAT boost too.

“If this starts to happen at scale, then the Treasury could be in for a windfall,” Webb told Money Marketing “If you were the chancellor, you would be rubbing your hands with glee.”

Indeed, for those over 75 — where pension wealth passed to anyone other than a spouse becomes taxable — the pressure to spend is now acute. And spend they are. Travel agents are reporting a boom in luxury bookings by retirees. Car dealerships are welcoming silver-haired first-time Ferrari buyers. And financial advisers say they’re flooded with pensioners eager to turn retirement savings into experiences.

Webb, who served as pensions minister from 2010 to 2015, says the irony is rich. “Given that the desire to pass on a cash inheritance was one of the reasons why some people chose to transfer out of their DB scheme, it would be an irony if they now find that those transferred balances are subject to IHT at 40%, plus any income tax payable by recipients.”

That “gold rush” from DB to DC pensions, he said, could end up being a poisoned chalice. “Over that period, many tens of billions of pounds were transferred out of DB pensions — where no IHT would fall due — to DC, where the full unspent balance could now be taxed.”

For those who transferred in their late 50s or early 60s during the post-2015 boom, the clock is ticking. “As this group gradually dies — and their widows or widowers also die — the impact of the pensions IHT change could grow significantly.”

Some retirees are responding with generosity — paying for school fees, family holidays, or simply covering the weekly lunch bill for grandchildren. Others are taking a more hedonistic route, swapping restraint for rail journeys across Africa and wine-tasting in New Zealand.

Webb doesn’t condemn them — he sees it as entirely rational behaviour. “Some people may feel that by acting in this way they can thwart the tax office by making sure that no IHT is payable on this money.”

But make no mistake, he says, it’s the Treasury that ultimately wins. “Instead of money sitting in pension pots and eventually passing on free of IHT on death in years to come, the Treasury is now getting a flow of tax revenues right away.”

So, while the Budget headlines were filled with farmers and furrowed brows, Webb believes it’s the pension tax tweak that will fill government coffers.

“It will be another IHT change in the same Budget which will ultimately raise far more money for the government,” he said.

And in the process, it may just spark a silver spending spree unlike anything we’ve seen before.