Steven Cameron, Pensions Director at Aegon: “The decision to bring ‘inherited’ pension pots left on death within the Inheritance Tax regime is a major change which may impact on retirement planning. For many individuals, their pension can be one of their most – if not the most – valuable asset they own. Adding pensions to estates could substantially increase the number of estates which become subject to inheritance tax. Extending the current IHT thresholds to 2030 adds to this issue. While everyone hopes to live many years into retirement, not all do so. Those who die early in retirement are more likely to leave a substantial pension pot which could now be brought within the IHT regime. But taking too much out of their pension too early risks running out of money later in life. While the Government has set out its intent, we hope there will now be full consultation around the detailed approach, and which avoids unintended changes in saver behaviour.”
Steve Hitchiner, Chair of the Society of Pension Professionals Tax Group, said: The Chancellor’s announcement about pensions being subjected to Inheritance Tax (IHT) is not entirely unexpected, indeed the SPP highlighted this possibility in its Pensions Tax report earlier this month. At present, a lump sum can be paid to an individual’s beneficiaries tax-free, up to £1,073,100. This is anomalous to the payment of a dependant’s pension, which is usually taxed as income. Pensions were never intended as vehicles for Inheritance Tax planning, so overall this makes sense, and is a more attractive solution for raising revenue than many of the speculated alternatives such as reforming pensions tax relief or imposing NICs on employer pension contributions. However, it will be important to see the detail and how this will interact with the practicalities of different pension arrangements.”
Martin Willis, Partner at Barnett Waddingham says: “Bringing people’s pensions into the Inheritance Tax umbrella is certainly a sensitive subject, and it’s clear the Chancellor isn’t pulling any punches when it comes to hitting her £40bn tax hike target. It’s an emotive issue, but ultimately, we’re discussing assets after the individual has passed away. Pensions were never meant as tools for Inheritance Tax planning, so one might argue that tax should be levied once pensions are converted into income. In many ways this change will be reminiscent for many of times before the Pensions Freedoms Act in 2015, prior to which benefits in drawdown were taxable. However, there are many technical questions which must be answered. It's unclear how this will interact with the lump sum and death benefit allowance (LSDBA), and inherited drawdown funds which will be taxable as income when withdrawn. And what happens when the pensions funds have to be withdrawn/taken as a taxable lump sum in order to fund the IHT bill? Will there be an expectation that pension schemes will pay IHT to HMRC before the distribution of death benefits? We must hope these questions have already been answered, rather than leaving savers in limbo for the weeks ahead."
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said: “It’s perhaps no surprise that the Government has decided to bring pensions into scope for inheritance tax as their exemption was little-known to the public. However, pensions have been seen as useful tool for estate planning and there will be individuals and families who have approached retirement and estate planning based on existing rules. Now, the value of pension pots will be added to the total value of other assets and if over the IHT threshold of £325,000, aside from other exemptions, will be taxed in the same way. This represents a fundamental shift to how wealthier individuals think about accessing their money in retirement. At present it makes more sense to access ISAs and other forms of saving before touching pensions. In time we’re likely to see more pensions, accessed earlier to prevent them from becoming part of people’s IHT bill at a later date.
“The end result of this change is that many more people will now be brought into scope for IHT. While there could be some benefit to the Treasury, pensions are a long-term investment and it’s vital that large-scale changes to how they are taxed are well managed to avoid any risk of undermining confidence in pensions and scaring people from engaging with their retirement savings. Carefully thought through implementation and clarity will be key, perhaps most prominently in the case of unmarried partners who could be at a disadvantage. This is because the IHT spousal exemption means married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die, however benefits paid to an unmarried partner can face IHT charges. Now pensions are set to fall into scope for IHT, surviving unmarried partners could end up with less income and therefore a lower standard of living in retirement.”
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