Broadstone has responded to the Government’s technical consultation – Inheritance Tax (IHT) on pensions: liability, reporting and payment. Broadstone is supportive of the Government’s objective to ensure that pensions are used for the primary purpose of providing an income for the member. While individuals may have other assets to use in their retirement or later life, we do not believe that pensions should be used as a vehicle for wealth transfer.
However, Broadstone holds concerns around the treatment of taxation around the value and control of lump sums both from Defined Benefit (DB) schemes and from death in service policies. The changes made in 2015 which allowed for significant tax advantages on death benefits where the member is younger than 75 on death have always appeared unduly generous.
Many DB schemes pay out lump sums on death but these are often by scheme design and not any form of wealth transfer- they are purely functions of the scheme’s rules and we believe these lump sums should continue to be exempt from Inheritance Tax. Death in service lump sums are often paid in respect of younger people experiencing a shock of early death. Thankfully, these are rare, but they are there to help next of kin at the worst possible time with the benefit put in place to help the family deal with the tragic loss of a loved one rather than for wealth management purposes. So again, Broadstone does not believe it should be in the scope of the policy to apply Inheritance Tax.
Both of these lump sums, if paid within 2 years of death, would be assessed against the Lump Sum and Death Benefit Allowance, and are subject to income tax or a standalone special tax charge if paid later. This seems sufficient should government policy wish to limit the size of these benefits.
David Brooks, Head of Policy at Broadstone, commented: “It is understandable that the Government is reforming the Inheritance Tax regime to ensure pensions are used for their primary purpose of providing income in retirement rather than enabling wealth transfer. However, we believe there are a few elements of the proposals that could be loosened, particularly where the primary purpose of lump sum payments is not for estate management. Tightening this regulation will create an IHT framework that ensures tax reforms are born by those with the broadest shoulders without unnecessarily penalising pension savers and their families in emotional and stressful circumstances. We are also concerned about the impact on “common law” partners who could also be treated unfairly compared to the current tax situation on death and we would urge the Government to consider updating the IHT tax system for the living circumstances of society.”
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