The latest government consultation on pension taxation could be a “potential bombshell” for anyone expecting to inherit a pension pot free of income tax, LCP has warned.
LCP stated that the government consultation, which was published as part of a bundle of tax consultations on July 18, could result in ordinary taxpayers having to pay income tax where they inherit an untouched pension pot.
This would represent a change from the current pension landscape as, since 2015, it has been possible to inherit an untouched pension pot free of income tax, where the person who died was under the age of 75.
Providing insight into the consultation, LCP explained that it was largely focused on the legal changes necessary to abolish the lifetime allowance.
However, whereas the LTA applies only to those with the largest pots, the new proposals would apply to anyone who inherited an untouched pension from a loved one who died under the age of 75, regardless of their pot size.
Although LCP acknowledged more details of the proposed legislation are still to come, the policy statement which accompanied yesterday’s announcement said that values will no longer be excluded from marginal rate income tax.
This was stated to take effect from April 6, 2024.
LCP went on to argue the benefits of the current system, such as the option for heirs to inherit money into a pension pot where it can remain invested, grow tax free, and be drawn out of income tax at any time.
If income tax were to be withdrawn on this, the only alternative would be to take the inheritance as a cash lump sum (which would remain tax free), the company argued.
This would lead to the recipient having to make “difficult” decisions about how to invest this money and how to manage it over time, as well as no longer benefitting from the pension “wrapper” with its associated tax breaks.
LCP partner, Steve Webb, commented: “For the last eight years, people have known that if a loved one died under the age of 75 they could inherit an untouched pension pot free of all tax.
“The money could sit in a drawdown account, being invested and growing, and would be a source of tax free income whenever needed.
Webb added that this tax advantage risks being "abolished" by next April if the new proposals are implemented.
"It would be totally unacceptable to make such a big change ‘through the back door’," he continued.
“If ministers plan to remove this pension tax break they should announce their plans publicly and have them properly debated”.
In response, a government spokesperson said: “We want to keep 15,000 experienced people in work to help grow our economy and clear backlogs.
"This includes seniors in the NHS who had told us that pensions tax was disincentivising them from working, which is why we have abolished the lifetime allowance.
