Pensions could be hit with a tax raid under suspected proposals to change retirement policy which could be unveiled in the upcoming Autumn Budget.
It is understood that pension pots could be made liable to inheritance tax in a move analysts are claiming “wouldn’t be very popular”.
What is inheritance tax?
This is a levy on the estates of individuals, including their money, possessions and property who have passed away and is charged at 40 per cent if valued above £325,000.
No IHT is paid if the value of someone’s estate is under this threshold or if they leave everything above £325,00 to their spouse, partner, charity or amateur sports club.
When someone gives away their home or property to children or grandchildren, the tax threshold can be raised to £500,000.
Estates are able to pay a reduced rate of 36 per cent on certain assets if 10 per cent of a Will if left to charitable organisations.
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“Lost” pension pots are huting Britons’ retirement GETTY How are pensions impacted by inheritance tax?
Retirement plans are usually exempt from the HM Revenue and Customs (HMRC) ley because they are not considered part of an individual’s estate.
Despite this, there are exceptions to this rule which could mean pensions are liable to pay inheritance tax.
These include:
- If someone moves funds from their pension into a savings or current account
- If someone makes large contributions to their pension while seriously ill and did not live for two years
- If someone made contributions to someone else’s pension fund
- If someone’s pension fund is not part of a trust arrangement.
Becky O’Connor, the director of Public Affairs at PensionBee, warned that changes to pension tax rules could have detrimental consequences.
She explained: “Bringing defined contribution pensions into someone’s estate for inheritance tax purposes would remove a key advantage that pensions have over other forms of long-term investment for those who are focused on tax efficiency.
“Income tax is already due on pension income for those who pass away after the age of 75.
“Making pensions liable for inheritance tax too could start to make them less attractive from a planning point of view and potentially dissuade people from saving into them.”
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Inheritance tax is applied to inherited assets worth more than £325,000, or total assets in excess of £650,000.PA
“Our own research indicates that this change wouldn’t be very popular amongst savers, with 51 per cent expressing that they plan to, or already have moved money into their pension to reduce the size of their estate,” O’Connor added.
“Instead, a significant proportion of savers (60 per cent) stated that they’d prefer if inheritance tax was scrapped altogether.”
GB News has contacted the Treasury for comment.
Rachel Reeves will announce the Government’s Autumn Budget in Parliament on October 30, 2024.