A proposed plan to tax some pensions after death has been axed by HM Revenue & Customs (HMRC).
It would have seen an ‘income death tax’ added to some pension pots from April 2024 but in a U-turn these proposals have been shelved.
Under the current rules, beneficiaries are able to inherit a tax-free untouched (uncrystallised) defined contribution pension pot and this has been the case since 2015.
If they choose to receive an income from the pension, via drawdown or an annuity, the money is not impacted by either inheritance or income tax if the person died under the age of 75.
But previously, a statement from the Government had said that from 6 April 2024, the rules around this type of pension would change and they would “no longer be excluded from marginal rate income tax under ITEPA [Income Tax Earnings and Pensions Act 2003]”.
The proposed change was criticised because if the same person took the inherited pension as a lump sum and it was within the £1,073,100 lump sum limit, it would remain tax-free.
‘Good news for pension savers’
Rachel Vahey, head of policy development at AJ Bell, said: “In a welcome move for pension savers, HMRC has U-turned on its previous plans to create a new pensions death tax for those taking income withdrawals.
“This is good news for pension savers. Creating a new stealth tax would have been a massive shift in policy, hitting hard the beneficiaries of pension savers who die early.”
‘An extra layer of pensions complexity will not be added’
Chris Hudson, managing director for retail intermediary at Standard Life, said: “Pensions are treated very favourably from an inheritance perspective with no tax due if the pension holder dies before 75 or at the marginal rate of the beneficiaries after that age.
“Under the original proposals linked to the scrapping of the allowance, where someone dies before 75, nominated beneficiaries would either have to receive the pension as a lump sum outside of a pension wrapper or as an income, taxable at their marginal rate.
“This proposed change is no longer being taken forward means an extra layer of pensions complexity will not be added.”
It was also announced in the Autumn Statement yesterday that the pensions triple lock will remain in place, giving retirees a boost of 8.5% to their state pension from April next year.
Plans were also put in place for a pension ‘pot for life’ scheme. This will give employees one pension pot which will follow them through different employers.