Pension savers are choosing to pay an extra £20,000 in income tax to avoid Rachel Reeves's inheritance tax raid, financial advisers have revealed.
Taxpayers with substantial pension pots are rushing to withdraw cash before private pensions are dragged into the inheritance tax net from 2027.
The move comes as savers attempt to avoid what experts describe as a "triple tax hit" that could see their heirs facing tax bills of up to 90 per cent on inherited pension assets.
Financial advisers report a "significant increase" in clients drawing down pension assets and willingly accepting higher income tax bills as a result.
Clients who previously limited pension withdrawals to £50,000 annually to stay within the 20 per cent tax band are now dramatically changing their strategy.
Nick Nesbitt of accounting firm Forvis Mazars said: "Lots of clients who were looking to save their pension before the Budget are now drawing more income out and accepting higher tax bills.
Inheritance tax is hitting Britons hard GETTY "The strategy previously was to limit withdrawals to £50,000 a year so you are only paying a marginal rate of 20 per cent. But people are now raising the yearly income to £100,000 and taking the 40 per cent tax hit."
This shift means accepting an additional £20,000 in income tax charges.
Inheritance tax is levied at 40 per cent on assets over £325,000, with an additional £175,000 allowance when passing a main residence to direct descendants.
However, beneficiaries of those who die over age 75 must also pay income tax at their marginal rate when withdrawing inherited pension savings. Estates worth over £2m lose the main residence relief at a rate of £1 for every £2 over the threshold.
This combination creates what accountancy firm RSM calculates could be tax bills of up to 90 per cent on pension assets.
Nesbitt explained that clients are withdrawing more money from their pensions today to avoid this "triple hit" for their heirs when they die.
He said: "We were previously working on people being able to pass on pension assets with 15 per cent to 20 per cent total tax to them and their beneficiaries.
"Now this needle can very easily swing up to 60 per cent or 70 per cent. People are wrestling with how they get back to a reasonable level they're comfortable with."
The dramatic shift in withdrawal strategies reflects growing concerns about the inheritance tax implications of the new rules. Under current rules, savers can take 25 per cent of their pension pot tax-free from age 55, up to a maximum of £268,275.
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All other withdrawals are treated as income and taxed accordingly.
Advisers typically caution against withdrawing more than £100,000 in a single year because of what Nesbitt calls the "60 per cent tax trap".
For every £100 earned between £100,000 and £125,140, £40 is deducted in income tax, while another £20 is lost from the tapering of the personal allowance.
This creates an effective 60 per cent tax rate within this income band.
Age and health are crucial factors when deciding how much to withdraw from pension pots, experts advise.
Jason Hollands of wealth manager Evelyn Partners said some clients had planned not to touch their pensions for as long as possible.
However, the 2027 changes have completely upended those strategies.
He said: "You've got to take into account the post-tax impact when you withdraw pension savings, that's important to consider. Some people will be taking tax-free cash, some people are increasing their withdrawal rate.
"Age and health need to be considered when deciding how much to take out. If you're healthy, basically, you have longer to extract money."
Major investment platforms have called on the Chancellor to reverse the inheritance tax raid on pensions.
In a January letter to Rachel Reeves, the bosses of Hargreaves Lansdown, AJ Bell, Interactive Investor and Quilter expressed serious concerns.
These firms collectively manage around £430bn for British savers. They warned the plans would hurt lower-income savers by increasing complexity.
The changes would also "compound an already difficult situation" for bereaved families.
With implementation still two years away, savers are now faced with difficult decisions about whether to accept higher tax bills today to protect their heirs tomorrow.
