Could the Labour Party impose a tax overnight on a pension I inherited from my husband?

I inherited my late husband’s retirement fund when he died at the age of 68.

I know that at this point I can take all the money tax-free.

Now that we have a change of government, if they decide to impose an income tax on withdrawals or a complete shutdown, do you think it is procedurally possible that the changes could be implemented overnight or gradually for existing funds? US

This is Money’s Tanya Jefferies responds: I’m sorry to hear that you lost your husband.

We have received many questions from readers who are concerned that the new Labour government may make unfavourable tax changes before there is time to take defensive measures.

It must be especially difficult to deal with these kinds of worries when you are grieving.

Of course, we don’t know what this autumn’s Budget will bring in terms of immediate new rules on pensions or inheritance, but the Government has launched a major pensions review in which everything will presumably be on the table for long-term consideration.

Meanwhile, Chancellor Rachel Reeves is expected to announce that a post-election audit found a £20bn hole in the public finances, which will have to be filled somehow.

In relation to your specific question, less generous rules on how pensions are inherited and taxed may be imposed, but they are much less likely to affect retirement funds already in the hands of grieving widows or other beneficiaries.

We asked a leading financial expert to break down his situation in detail below.

Lisa Caplan, director of financial planning at Charles Stanley, responds: Many people are now considering taking the tax-free money available from defined contribution pensions in case the new government is willing to change the rules or the tax regime.

Your dilemma is a variation on this theme.

Under current rules, within two years of a pensioner’s death before age 75, the beneficiary can take the entirety of their inheritance tax-free up to a maximum of £1,073,100, including any tax-free cash they have already taken.

Typically, the other main options are to keep the pension fund and draw taxable income from it at some point, or to buy a lifetime income from it through an annuity.

There may be good reasons to access the full amount quickly in a lump sum. Being able to withdraw the full value of the pension, regardless of its size, is very attractive from an income tax perspective.

After the two-year period, any withdrawal will be subject to income tax, and this is also always the case in the event of the death of the pension holder after the age of 75.

However, it is not always obvious that taking all the money at the first opportunity is the right thing to do.

Taking money out of your pension means taking it out of an environment where all investment growth and future income are tax-free.

If your income tax rate is likely to be low at some point, you may be able to spread out withdrawals when you need them without paying a significant amount of income tax anyway.

However, with personal tax allowance currently frozen at £12,570 a year, most people will end up paying tax on even modest withdrawals.

Another aspect to consider is inheritance tax. Under current rules, pension funds can be passed on to children or other beneficiaries tax-free, and this could prove valuable for estate planning, if it is actually relevant in your situation.

However, it is worth noting that if we see changes to pension rules under a Labour government, this is also an area that could be in the spotlight.

Coming back to your specific question, it is not ruled out that a change in rules could affect you as the holder of your late husband’s pension fund.

However, this may not be very relevant, as any decision to buy tax-free marijuana depends on it being made within a two-year timeframe. So, you will need to decide on your strategy as soon as possible anyway.

As to whether a rule change could be implemented overnight, as you say, and thus ensnare you, this would certainly break with convention.

Significant changes almost always apply beginning with the new fiscal year, or at least with fair warning.

Any sudden alteration affecting existing funds from previous deaths would be draconian and highly insensitive to people like you, who are dealing with financial planning while probably still in a period of grief.

Rather than imposing changes retrospectively, I imagine the sensible thing for the government to do, if it really wanted to make a change in this area, would be to apply it from the beginning of a new financial year, or at least on pension funds resulting from deaths on or after a certain date.

In short, while I can’t rule it out entirely, it would be a real surprise if any rule changes in this area affected you without you being able to act.

This is therefore normal planning as regards the time frame involved and the balance between income tax and inheritance tax issues.

One approach would be to withdraw and fund the full ISA contributions over a number of years to maintain the money’s tax-efficient status.

At £20,000 a year, this can absorb a considerable portion of most funds.

However, if the pension is higher, I would recommend that you seek regulated financial advice to formulate an appropriate plan that takes into account your precise circumstances and objectives, as well as considering all possible tax implications.