The Labour Party has initiated the biggest change in financial advice, pensions and inheritance tax (IHT) since 2014, with HMRC already amassing a record £8.2bn worth of IHT between April 2024 and March 2025.
Levied on estates upon death, IHT is charged at 40% of an individual’s estate over the £325,000 nil rate band and the £175,000 residence nil rate band – both of which have been frozen until 2030, dragging more people into paying taxes.
On top of that, starting from April 2027, pensions will be going into people’s estates for IHT purposes.
James Corcoran, senior chartered financial adviser at Lumin Wealth, said: “Before, many of my clients had only a small IHT liability or none at all. Now, those with significant pension pots have a much more serious IHT bill and it’s really about understanding the best way to approach that and what options make sense.”
But the concerns have been centred around the upcoming Budget. Much-discussed in the media, it has been fuelling fears and prodding people to act pre-emptively to avoid the tax man – sometimes recklessly.
“Huge sums” are being withdrawn from pension schemes as tax-free lump sums, said Corcoran, on the rumour that the current 25% tax-free allowance might be cut.
The most recent FCA Retirement Income Market analysis showed a giant increase in the number of pensions from which tax-free cash was taken: from 29% between 2023-24 to 63% in 2024-25.
But people who have taken the cash without a plan might have created a disadvantage for themselves. If the money is now just sitting in a bank account, it has been moved from somewhere where it was growing tax-free into a taxable account incurring income tax on the interest.
“If someone says: ‘I want to take out my tax-free cash because I’m worried Labour will take it away,’ they need to stop and think about the implications,” he said.
For someone aged 72 who planned to take it out by 75 anyway, it doesn’t make a big difference, but for someone aged 60 wanting to take out the full amount, the planner has generally advised against it because “so much can change”.
“Pension legislation changes all the time and they could lock in only 25% of their current value when, had they left it 15 years, it could have doubled, giving double the tax-free cash,” Corcoran said.
“It’s worrying when people jump to short-sighted conclusions. That’s not to say you shouldn’t act where there’s a clear benefit, but it’s about making sure you’ve considered all the implications.”
Hargreaves Lansdown head of retirement analysis Helen Morrissey urged people not to take the lump sum just because they can, but only if they know what to do with it, for example as part of a long-term plan to pay off their mortgage, travel or to make home renovations. She also suggested to reinvest some into a stocks and shares ISA, but that’s capped to £20,000 a year.
Those who wish to take the money out now and perhaps reconsider after the Budget should make sure they don’t fall foul of pension recycling rules, which apply when HMRC believes someone has taken tax-free cash and reinvested it into their pension to benefit from extra tax relief.
“This could land you with a nasty tax charge with HMRC looking at issues such as how much was taken, the proportion of tax-free cash contributed, whether there has been a significant uplift in contributions, as well as whether it was pre-planned,” Morrissey explained.
“Being landed with a tax charge could significantly derail your long-term plans so if you’re looking to do this, financial advice can help.”
Finally, those with large estates might think about gifting their money away now, rather than leaving it to loved ones in their will to avoid a potentially higher tax bill on the estate.