Grieving families could have to wait more than a year to access their loved ones’ pensions as the Government keeps hold of half the funds. Under new Budget rules, pension administrators will be able to hold up to 50% of retirement funds while HMRC determines how much inheritance tax is owed.

It comes after Rachel Reeves announced that pensions will be dragged into death duties from April 2027, at rates of up to 40% if their unspent pensions push their assets above the threshold of £325,000. Finance experts warned that this could lead to a “nightmare” situation, where families may not be able to access vital funds at times when they need financial support.

Rachel Vahey, of AJ Bell, told GB News: “Unless HMRC chooses to change the way inheritance tax is applied to pension funds, thousands of families will in future be faced with a tax admin nightmare of the worst kind, at the worst possible time”.

Married couples and civil partners can currently protect up to £1 million from inheritance tax, but when pensions are included, it is expected to drag about 10,500 more households into inheritance tax every year. 

The situation has been compounded by Reeves’ decision to freeze inheritance tax thresholds until 2031, so as inflation increases, more families will be pushed into the death duty bracket.

Andy Butcher, of wealth manager Raymond James, said that pensions being “readily accessible” after a loved one dies helps prevent families from “being tied up in a potentially lengthy probate process”.

“If this is no longer the case, it may lead to a further erosion of confidence in the pension market,” he added.

The inheritance tax threshold in the UK is currently set at £325,000, which increases to £500,000 if main residences are passed onto children. Anything above is charged at 40%.