Pensions minister Steve Webb has stated that the government does not want pensions to become a “vehicle for inheritance tax planning”, as he responded to a question over the above marginal rate taxes that will initially be imposed on lump sum withdrawals from April.
During an exclusive ‘Ask the pensions minister’ Q&A session with FTAdviser sister title FT Money this afternoon, a reader questioned the 45 per cent tax on withdrawals after the new freedoms come into force and asked why pensions are not subject to IHT.
Mr Webb responded that whether or not inheritance tax is due on a payment from a pension depends on individual circumstances, “although most payments currently fall outside the scope of inheritance tax”.
The pensions minister added that the 45 per cent tax which will replace the 55 per cent authorised tax charge on pensions passed on after death, which was branded the ‘death tax’, will last for only one year and the intention is to apply marginal rate taxes only from the 2016 financial year.
He said: “The changes announced by the chancellor to the 55 per cent tax rate on inherited private pensions don’t affect that. But while many people will no longer be subject to the 55 per cent charge.
“That’s why if the individual dies after the age of 75, the beneficiary will be able to take the funds subject to their marginal rate of income tax, or at 45 per cent if the funds are taken as a lump-sum payment.”
Chancellor George Osborne dropped a second bombshell at the Conservative Party conference last autumn when he announced the end of the death tax, in a move that will allow individuals to pass on their pension tax free to spouses and to descendents.
Some have said the changes mean pensions have become an important tax planning tool, though unless the member was under 75 when he or she died income taxes will always apply to withdrawals with no test against a nil-rate band as is the case with IHT.
Responding to a separate question about when people would be able to book the promised guidance sessions, Mr Webb revealed that in order to manage roll-out more effectively some initial guidance sessions will be undertaken before the reforms come into force on 6 April.
He reiterated that the Pensions Schemes Bill is still going through the House of Lords for full parliamentary approval, “but to manage the process more effectively we are planning to undertake some initial guidance sessions before 6 April.
“My colleagues at HM Treasury will shortly be publishing an update on the work on the guidance guarantee.”
Mr Webb also argued that any further delay to annuity market reforms would have caused real problems, stated pensions minister Steve Webb, adding that even since the 2014 Budget there are “hundreds of thousands” of people waiting patiently for the new rules.
He stated that one of the challenges the coalition faced was that many people were unhappy with being forced to buy an annuity and wanted the system changed as soon as possible.
“Even announcing in the March 2014 Budget for implementation in April 2015 we have hundreds of thousands of people who are waiting patiently for the new rules; further delay would have caused real problems.”
Responding to concerns that many employers and large companies cannot move quickly enough to put through legislation that was only enacted late in December, he added: “We recognise that this is a big challenge for pension schemes and pension providers, and are working with the industry to help them get ready for the new freedoms.”
peter.walker@ft.com
