Major pensions warning as Rachel Reeves threatens 'total disaster'

Inheritance tax hikes introduced by Chancellor Rachel Reeves will be a "total disaster for future pensions", an expert has warned. Former pensions minister Ros Altmann said the Chancellor must "urgently change" her plans or risk leaving "millions" of people poorer in retirement.

But Baroness Altmann also said the Chancellor "is bound to look at pensioners and pension spending as a potential source of extra revenue" in her next Budget, on November 26. Ms Reeves announced last year that unspent pension pots will become liable for inheritance for the first time, from April 2027. She also said the inheritance tax threshold of £325,000 will be frozen until 2030.

The changes are expected to raise an extra £2.3 billion every year and double the number of grieving families liable to pay inheritance tax. But financial advisers say many older people are already rushing to spend their pension pots, instead of saving money to pass on to loved ones, in order to avoid tax.

A particular concern is that many older people under-estimate how long they will live, and are at risk of running out of funds with years or decades ahead of them.

Baroness Altmann said: "The Government must urgently change its proposals for imposing inheritance tax on unused pension funds. The measure will be a total disaster for future pensions, with people rushing to withdraw as much as they can, as soon as they can, particularly up to the annual £50,270 higher rate income tax threshold, with less money going into pensions, and millions more poorer future pensioners."

She said the Chancellor could instead introduce a special tax for unused pensions, at a significantly lower rate than the 40% charged on inheritance.

But she also warned that Ms Reeves was certain to impose yet more taxes on pensioners because the Chancellor is desperate to increase funding on infrastructure and research at the same time as the benefits bill rose.

Options include higher taxes on pension withdrawals, or on the contributions made by working people saving for retirement, Baroness Altmann said.

And she said the Chancellor could impose National Insurance on pension income, which could "raise billions, but would hit millions of ordinary pensioners".

A House of Lords inquiry will on Monday quiz experts, including representatives of the Law Society of England and Wales, about the impact of taxing unused pension pots .

Sir Steve Webb, another former pensions minister, has warned that more than four million people could pay tax on their state pension for the first time in 2027 unless the Chancellor takes action.

The state pension is likely to rise by around 4.8% next April, meaning the full new state pension will rise above the £12,570 income tax threshold.

Ms Reeves has confirmed she is looking at tax rises in her Budget, saying this week: "Of course, we're looking at tax and spending".

And she dropped hints that she plans to impose new taxes on the most wealthy, saying this week that those with the "broadest shoulders" should pay their share.

She has repeatedly insisted that she will not abandon tough self-imposed rules preventing her from borrowing more, leaving a combination of spending cuts and tax rises as her only option.

Conservatives have urged the Chancellor to cut the welfare bill instead of hiking up taxes. Shadow Chancellor Sir Mel Stride said: "My message to Rachel Reeves is loud and clear.

"Cut government spending and avoid the need to break your promise and raise taxes again."

The Institute for Fiscal Studies (IFS) has said it expects the Chancellor will need to find at least £22 billion next month, but the figure will be higher if she goes ahead with reported plans to scrap the two-child benefit cap.

Ms Reeves has also said her Budget will include "targeted action to deal with cost of living challenges", which it is thought could include cutting VAT on energy bills or reducing "green" levies which subsidise renewable energy schemes.

The National Institute of Economic and Social Research has said the Chancellor will need to find around £50 billion a year by 2029-39.