Death tax raid plan for pension pots is ‘ticking time bomb’

One of the many advantages of saving in a pension is that if you bequeath a pension pot to your loved ones, they do not face an inheritance tax bill.

And there are also income tax advantages as well.

In 2015, former Conservative chancellor George Osborne introduced some important income tax breaks when someone dies under the age of 75 and passes on a pension pot.

But one of those tax breaks is now at risk under proposals published this week. As things stand, if you have money in an untouched pension pot, your heirs can generally inherit this money in the form of a pension in their name.

They can leave this money to grow and/or take it out when they want it.

Crucially, if you have died under the age of 75, your heirs can take the money out of their inherited pension pot free of income tax.

All this may be about to change.

The small print of complicated tax documents published by the Treasury this week reveals that they are considering reversing this tax break, with effect from April next year.

If the changes go ahead as proposed, whilst you would still be able to inherit a pension pot, it would, in the words of the consultation, “…no longer be excluded from … income tax”.

Whatever the pros and cons of this change, this is a terrible way to change tax law.

If my colleagues had not gone over this document with a magnifying glass, it is possible that no one would even have spotted what the Government was up to.

When George Osborne announced the new favourable tax regime for inherited pensions it was done with great fanfare at a party conference.

If the plan is now to go back on that policy, it should be done equally publicly so that there can be a proper informed debate.

Sir Steve Webb is a Partner at consultants LCP.

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