IFAs have criticised proposed reforms to the pensions tax system, calling them "ludicrous" and "ridiculous".
In a report called “Death and Taxes and Pensions”, the IFS said basic-rate income tax could be levied on all funds that remain in pensions when people die, and pension pots should be included in the value of the owner’s estate for inheritance tax purposes.
Under current legislation, if an individual dies before the age of 75, any funds in their pensions are not subject to income or inheritance tax.
“I just think it's ludicrous that this was suggested by the IFS,” said Jeremy Webb, an adviser at Concept Financial Services.
“What about all the clients who have received advice historically to transfer DB pensions into DC schemes, with one of the key benefits to pass the funds tax efficiently to their beneficiaries?
“This could lead to complaints en masse with advisers picking up the tab.”
Webb said his main concern, were these tax changes introduced, would be that people would be discouraged from saving into pensions, and even cause them to spend more aggressively in retirement.
“To me, it seems a bizarre suggestion.”
Richard Bishop, managing director at PFEP Wealth Management, said it was “pretty ridiculous”.
“[If this was introduced] you would see a range of life insurance products developed to mitigate the tax paid via the pension income…or even built into pension schemes.”
He also highlighted some areas of the policy that are unclear.
“[Does the] IHT spousal exemption still apply?”
Greg Neall, chartered financial planner at Wake up your Wealth, said subjecting pension pots to IHT would be a “legal nightmare”.
“IHT is paid on the assets a person owns, and the money in a pension is not owned by the person that gets it,” he said.
However, he added that the current taxation cliff edge at age 75 is an “unfair cut off” based on an arbitrary age.
“I would like to see income tax applied to any inherited DC pots, where any crystallisation has occurred, with flexible benefits available to all beneficiaries.
“A tax free lump sum can be maintained on purely uncrystallised funds.”
Others in the industry were more positive on the potential reforms, with Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, saying the tax treatment of pensions on death is “extremely generous”.
“Pensions escape inheritance tax while other types of assets do not - and where death occurs before the age of 75 there is no income tax to pay.
“The IFS is right to point out such treatment may lead to behaviour where some people stockpile money in pensions and leave them untouched while drawing down on other assets.”