Savers at Risk of Facing ‘Triple Tax’ on Pensions, Raising Concerns About Future Retirement Savings

Savers could face paying tax on their pensions three times due to ongoing changes in government rules. Chancellor Rachel Reeves revealed that many retirement savings will soon be affected by inheritance tax, with one in ten families expected to face the levy as their estates exceed the frozen tax-free thresholds. Last year, only 5% of estates paid inheritance tax.

On top of that, some pensions will be taxed twice. If a retiree dies after the age of 75, their beneficiaries will have to pay income tax on the pension withdrawals.

In a worst-case scenario, a small number of retirees could face a triple tax, having already paid a 25% or even 55% tax on their pension savings. According to The Telegraph, these changes are raising concerns among savers.

Pension Savers Face Rising Tax Burden as Lifetime Allowance Changes Spark Concerns

Until this year, people could save up to £1.07 million in their pensions without paying extra tax, thanks to the lifetime allowance rule. But the government abolished this limit in April.

Previously, if someone's pension exceeded this amount, they faced additional taxes. If they took the money all at once, they’d be taxed at 55%, or 25% if they took it over time. In 2021-2022, more than 11,000 people paid this extra tax.

For instance, if someone had a pension worth £1.32 million in 2022, they would have paid £62,500 in extra tax. After the new changes in 2027, if this person dies and their pension grows to £1.39 million, their family would be hit with an inheritance tax of around £369,550.

If the person’s beneficiary is a high-income earner, they could lose another £460,000 in income tax when they withdraw the pension. In total, nearly £1 million of their pension could be taken by taxes over the years.

Jon Greer from Quilter explained that when pension rules change, some people benefit while others lose out. The removal of the lifetime allowance has helped those who were facing extra charges, saving them a lot of money. However, people who had to pay these charges in previous years have effectively lost out, as they wouldn’t have had to pay them under the new rules.

The changes coming in 2027 will hit wealthier individuals who have delayed accessing their pensions to reduce their inheritance tax bills.

Greer also pointed out that the government has an important job in encouraging people to save enough for retirement. If pension rules are changed in the wrong way, it could lead to bigger problems down the line, making it harder for people to save for the future and damaging trust in long-term pension planning.

Frequent Pension Rule Changes and New Inheritance Tax Hit Savers Hard in Latest Budget

The lifetime allowance was changed several times over the years before it was finally removed. Meanwhile, Labour dropped its plans to bring back the £1.07 million limit but did introduce a tax on pensions after death in the Budget.

Kate Smith from pension company Aegon said that pension rules are constantly changing, with major changes happening almost every year. For example, there were pension freedoms introduced in 2015, followed by changes to the lifetime allowance and its removal in 2024.

She added that a small group of people will be affected by these changes, especially those who have been impacted by multiple rule changes. Some savers received protection for the lifetime allowance, but official figures show that not everyone did.

Smith stressed that the government needs to consider how all these changes are affecting people's saving habits and decisions.

In the Budget, the Chancellor announced £40 billion in new taxes, mostly from an increase in employers' National Insurance contributions. The new inheritance tax on pensions is expected to bring in £1.5 billion each year by 2029-30.

Rachel Reeves, the Chancellor, defended these tax hikes, saying they are necessary to fix the country's finances and improve public services.