Budget: Pension changes 'will give rich massive inheritance tax loophole'

The rule changes mean people who can afford to will be able to save far more money and pass it along tax-free when they die.

The pension changes announced in the spring budget are tantamount to a stealth increase in inheritance tax, financial experts have said, with the wealthy now able to pass along far more tax-free money than they could before.

Changes to pensions announced by chancellor Jeremy Hunt on Wednesday included the scrapping of the lifetime pensions allowance limit of £1m and increasing the annual allowance from £40,000 to £60,000 in an attempt to retain doctors – who Hunt said often slash their hours over pension rules.

But Hunt's new approach also appears to have opened an tax loophole that bypasses the tax-free limit on inheritance.

"Chancellor just announced a massive inheritance tax loophole – put as much as you can into your pension, then take it out if you need it, if not it goes to your heirs tax-free," tweeted James Browne, the head of work, income and inequality analysis, UK at the Institute for Global Change.

Browne told Yahoo News UK: "Essentially the changes as a whole mean that you can save more in a pension over the course of your life. At the moment, you can save up to £40,000 a year until you reach a maximum of just over £1 million – so the two big changes coming in are annual limits going up from £40,000 to £60,000 and there isn't going to be a lifetime limit.

Image of senior man - grandfather and his granddaughter having fun at home
As pensions are not counted as part of people's estate when they die, their pension pots can be passed along to their heirs. (Getty)

"So, in principle, you can put in £60,000 every year and no matter how large the returns are, you can still benefit from the tax advantages."

He explained that because pensions are not counted as part of people's estate when they die, their pension pots can be passed along.

"You can leave whatever money you have in your pension left over at the end of your life to your heirs and they don't have to pay inheritance tax on that money that's in the pension – that, essentially, becomes one of their pensions – so they would have to pay income tax on money they take out of that pension but not inheritance tax."

However, Browne pointed out, Hunt has retained an annual pension savings cap (albeit a larger one than before) and has kept the tax-free lump sum cap at 25% of the previous lifetime allowance – meaning people can take £268,000 tax free.

For many who have been pushing for the pensions cap to be raised or scrapped, Hunt's measures are fixing a price cap the Conservative Party itself put in place - the allowance stood at £1.8m in 2011 before being cut.

LONDON, UNITED KINGDOM - MARCH 15: Britain's Chancellor of the Exchequer Jeremy Hunt holds the Budget box outside 11 Downing Street ahead of the announcement of the Spring Budget in the House of Commons in London, United Kingdom on March 15, 2023. (Photo by Wiktor Szymanowicz/Anadolu Agency via Getty Images)
Jeremy Hunt has defended his decision to change pension rules for everyone. (Anadolu Agency via Getty Images)

Former minister for pensions Steve Webb told Yahoo News UK: "It has always been the case that pensions don't count as part of your estate when it comes to inheritance tax.

"The significance of raising the lifetime allowance is that you can now get more money in your pension. So even if you can't get more tax-free cash, it would mean more of your estate if you died before you'd spent all that money comes without inheritance tax.

"The risk is that people, subject to their annual savings limits, might move all their savings into a pension and then if they die there is less inheritance tax. Nothing has changed for people with modest pensions but people who were bumping up against the limits now have more flexibility to take advantage of."

Webb also added his voice to the growing number of people questioning why Hunt couldn't have introduced a medic-specific pension to keep doctors in work, rather than simply upping thresholds for everyone.

Responding to Labour's accusation that he had created a budget for the wealthy, Hunt argued making such specific changes to pensions would take too much time.

Labour leader Sir Keir Starmer told broadcasters of the pensions changes: “I recognise that we need to retain our doctors.

“What [shadow health secretary] Wes Streeting and I are clear about is there could have been a tailor-made approach for doctors but in the end we’ve spent £1 billion on the richest 1% while everybody else is struggling with the cost-of-living crisis.

“I think most people would say, ‘How on earth can that be a priority for the government?'”