An interesting headline, but just because someone doesn’t think it will work doesn’t mean it still won’t happen.
The following is a brief article by Alina Khan, published in FT Adviser, discussing the potential application of Inheritance Tax to pension funds on death, as proposed by Rachel Reeves in her Budget last October. While we await the outcome of the ongoing consultation on this issue, I thought you might find the piece insightful. It highlights how various stakeholders are exploring creative and possibly more workable alternatives for generating tax revenue from pensions upon death.
“There will always be winners and losers with any new tax policy but it is better than having a policy that does not work at all, according to Tom Selby, director of public policy at AJ Bell.
Speaking as part of a panel discussion at a Tisa (The Investment and Savings Alliance) report launch, Selby alongside Kirsty Anderson, retirement and tax specialist at Quilter and Andrew Tully, technical services director at Nucleus, discussed alternative policies to the government’s plan to bring IHT into the scope of pensions.
The report by Tisa looked at two alternative proposals.
These were for inherited pension pots and DB lump sum death benefits to only be taken as taxable income over time if the beneficiary is a dependent.
The second was for a standalone flat rate ‘inheritable pension tax charge’ to be paid on all unused pension funds and DB lump sum death benefits above a threshold.
Selby pointed out that with any new policy there will inevitably be some losers but that was better than the current proposal, which he said did not work.
“Whatever is brought forward [by the government], whether it will be IHT [on pensions], one of the two proposals from the report or something else entirely, people are going to pay tax on death in a way they don’t pay tax on death at the moment,” he said.
Any challenges a new tax policy would bring would need to be “worked through”, according to Selby but he reiterated there would always be some losers in any scenario.
The current proposals to bring IHT into the scope of pensions was the most “complex, convoluted and time consuming” way to tax pensions on death, Selby said, urging the government to take a step back and fully examine whether IHT was the best route to go down to raise revenue.
Poor consumer outcomes
Tully believed the current proposals would cause poor outcomes for everyone, from beneficiaries who will receive benefits slower, to personal representatives who will have more work to do and ultimately for HMRC who will get money slower.
He felt the proposals laid out in the Tisa report would speed up the process and allow beneficiaries to access funds quicker.
“If we can get the money out to beneficiaries quickly, within a couple of months, that has to be much more preferable than waiting nine to 10 months,” he added.
Tully also pointed out many people have multiple schemes and therefore the process may be delayed due to one scheme taking longer than others to process the request, if the current proposals were to go through.
“Having to wait until the slowest common denominator [the pension scheme] figures out what they are doing in a year’s time, before everyone else can start paying out, doesn’t feel like a particularly helpful situation.
“So being able to leave each scheme to pay money out as quickly as possible can be a huge benefit for the beneficiaries,” he added.
Although it was not part of the modelling in the Tisa report, Anderson felt it was important to mention consumer behaviour and how the government’s proposals would discourage people from saving into their pension because of the unknown IHT liability.
Speaking to advisers, Anderson had anecdotally heard of many questioning the point of using pensions going forward if people will be penalised for saving into them.
“While it [pensions] will change and evolve it will definitely still have its place but if people are no longer going to save into their pensions or not save as much, it is going to possibly move the reliance back on the state. It is something we need to consider,” she said.
Renny Biggins, head of retirement at Tisa, similarly had heard anecdotal evidence of clients being advised to draw their pension down quicker with people in the future potentially not contributing as much because of the IHT liability.”
Rest assured, as soon as the results of the consultation are published, I will be in touch again.
Please feel free to pass this to anyone who might find it interesting.
As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
