Tax consultations published last week included a big-hitting item concerning inheritance tax and their exclusion from marginal rate income tax.
Since 2015, pensions could be inherited free of inheritance tax and income tax, where the person who died was aged under 75. This inherited money, a beneficiary drawdown account, could remain invested and grow tax-free, and then be drawn out free of income tax. However, HM Revenue and Customs’ new consultation on pension taxation could mean that income tax is now payable on that untouched pension pot.
The wider consultation was mainly focused on the legal changes needed to implement the abolition of the Lifetime Allowance. This lifetime limit on tax-relieved pension pots only applies to those with the biggest pots. However, the changes to the taxable status will affect untouched pensions of all sizes.
What do these changes to inherited pension taxation mean?
If it does go ahead, this change to inherited pension taxation would take effect from April 2024. The recipient would now need to take the inheritance as a cash lump sum, which would still be tax-free, but the difficulty would come in deciding how to invest and manage this money over time, without having the associated tax breaks of a pension wrapper and the risk of inheritance tax on remaining funds after their own death.
Some commentators are critical of the Government for putting the proposals out via a consultation. They suggest that ministers should announce their plans publicly if they plan to remove this pension tax break so that they can be properly debated.
Bond Adams offers advice on pensions, including support for the trustees of pension schemes, employers, representative members and pensions professionals. We have offices in Aldershot, Birmingham, Leicester and London, and work with individual and corporate clients around the world. The track record of our lawyers before the Pensions Ombudsman and the Courts is unrivalled. If you would like advice about how the new changes might affect your pension and your financial planning, get in touch with us at [email protected].