Merryn Talks Money UPDATE: Why Your Tax-Free Pension Lump Sum Is Under Growing Threat
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Sep 17, 2025 Mark Wood, an expert in UK pensions and Chairman of Everest Funeral Concierge, dives into crucial changes in pension reforms. He discusses the complexities of tax-free pension lump sums and the shifting responsibilities of inheritance tax from providers to families. The conversation also highlights the potential tax implications of gifting and the unexpected challenges posed by political changes. Wood emphasizes strategic planning to navigate these evolving regulations, ensuring listeners are better prepared for their financial futures.
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Pensions Became IHT-Free Assets — Then That Changed
- George Osborne's 2014 changes turned defined-contribution pensions into inheritable, IHT-free assets and removed compulsory annuitization at 75.
- Rachel Reeves' proposed reversal would make pension pots subject to inheritance tax and shift burdens onto grieving families.
Policy Created A Strong Pension Incentive
- The tax treatment created a powerful incentive to prioritise pension contributions over other savings like ISAs.
- That incentive fuelled behaviours like equity release to preserve pension pots for heirs.
Heirs Face Potential Double Taxation
- Proposed rules (from April 2027) may tax pension pots and make heirs liable for income tax on withdrawals over 75.
- Combined IHT and income tax could push marginal rates on inherited pensions toward ~67% in some cases.