PensionsDec 15 2022

Pensions should be subject to tax on death, IFS says

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Pensions should be subject to tax on death, IFS says
BySally Hickey

These measures should be announced as swiftly as practical, the report said, in order to reduce the extent to which individuals saving in a pension are planning to bequeath it to their beneficiaries. 

Unintended consequences

Jon Greer, head of retirement policy at Quilter said these measures only make the situation ‘fairer’ for the exchequer, and not necessarily families especially those who may lose a loved one at a relatively early age where the financial impact can be significant.

“The tax-free nature of a pension pot on death at earlier ages can provide some much-needed financial support for those families [who have lost a loved one],” he said.

Changing the rules may have some unintended consequences too, Greer added, such as pushing people to take their tax-free cash lump sum earlier than perhaps they would ordinarily do so potentially reducing the overall amount they have available for retirement.  

“In the grand scheme of things, the lost revenue to the exchequer from this policy may not be significant compared to other areas of government spending, but may have a very positive effect for a material number of families which are not high earners or fit into some of the extreme examples highlighted.”

He highlighted the extra £1bn the government will be receiving from the freezing of IHT thresholds for a further two years in the Autumn Statement. 

“These additional changes to pensions would drag even more people into paying what is often touted as one of the nations most hated taxes.

Retirement outcomes are currently being compromised by a lack of understanding about pensionsAlice Guy, Interactive Investor

“Ensuring that everyone has the ability to save for their retirement and have some financial security in their later years is important for both individual well-being and the overall health of the economy.”

Alice Guy, personal finance editor at Interactive Investor, said the report was “strong stuff” and the content will be up for debate. 

“As part of this conversation, it’s crucial that trust in pensions is preserved and that investors continue to see pension saving as a tax-efficient and attractive in the long-term.

"Inheritance tax and pensions are highly emotive and any changes could have a significant impact on trust and confidence in the pensions system.”

Changing the rules around inheritance tax and pensions could significantly impact on the attractiveness of pension saving and income drawdown, she added, whereas defined benefit pensions with survivor benefits would not be impacted by a rule change.

"More than anything, retirement outcomes are currently being compromised by a lack of understanding about pensions. It’s important that we focus on making sure the next generation are retirement-ready.”