Pensions  

Advisers told to brace for death benefits changes

Advisers told to brace for death benefits changes

The current treatment of pension pots after death is too generous and advisers should be ready for it to change, according to John Bunker, who works in the tax trusts and estates department at law firm Irwin Mitchell. 

Speaking at FTAdviser’s Tax Efficient Investment summit in London today (February 13), Mr Bunker said the present system, which was implemented by George Osborne in 2015, might be viewed as “very generous”.

And given that the Institute For Fiscal Studies (IFS) think tank said chancellor Sajid Javid may turn his attention to pension tax death benefits, this could be an area that will see some changes in the March Budget, he said.

Since Mr Bunker was speaking at the event Number 10 has announced a reshuffle at the top of the Treasury with Sajid Javid being replaced by Rishi Sunak as Chancellor of the Exchequer.

Under the current system, anyone who inherits a pension pot from someone who died after the age of 75 pays tax on it at their own marginal income tax rate.

Prior to 2015, only spouses paid tax on the pension pot at their marginal rate, everyone else paid 55 per cent on an inherited pension pot.

Prior to 2015, if a person died before the age of 75, their spouse or children under the age of 23 paid no tax on a pension pot if it had yet to be accessed, though if it had been accessed, they would pay 55 per cent.

But since 2015, if a person dies before the age of 75, there is no tax to pay on the pension pot for those that inherit it.

Rachel  De Souza, partner at RSM, noted that a recent paper from the House of Commons library had focused on the income tax reliefs associated with pensions, so this-pre-75 tax relief may be in the government's sights as part of a broader review of pensions. 

Rachel Vahey, senior technical consultant at AJ Bell, said: "Possible changes could be to remove the age 75 exemption – so that all pension money is subject to income tax in the hands of the recipient regardless of how old the pension scheme member is when they die.

"But I hope that doesn’t happen. Many people have saved more pension money because of these new rules. And that pension money is helping them achieve a better income in later life."

Mr Bunker said: “The chancellor committed before the election not to increase VAT, National Insurance or income tax. But there is a need to raise revenue, so I think allowances and reliefs will be looked at. One such area may be the pension death benefits changes which were introduced in 2014, and which are very generous.” 

Steve Webb, partner at pensions consultancy firm Lane Clark and Peacock, and a former pensions minister, told FTAdviser: “Since 2015, the tax rules around inheriting a pension pot have become incredibly generous, especially where someone dies before age 75. 

"If the Chancellor is short of money and has ruled out increasing headline rates of income tax and VAT, he may well look to raid corners of the tax system such as pension tax relief.