There is an interesting lesson to be learned from a think tank’s pension criticism.
Think tanks come in many different guises, some more independent than others. Those without political links – overt or covert – can often provide a valuable, spin-free insight into government policy. One of the best known in this category is the Institute for Fiscal Studies (IFS) whose director, Paul Johnson, is near ubiquitous in the media at Budget time.
As its names suggests, the focus of the IFS is taxation, but it covers many other related economic areas from student finance, through savings and investment to health and social care. In a recent report, Death and taxes and pensions, the IFS took a close look at those three topics. The report’s findings included:
- Pensions are being increasingly used as a vehicle for bequests. The IFS view is that the current tax system, which dates back to the introduction of pension flexibility in 2015, “results in the bizarre situation where pensions are treated more favourably … as a vehicle for bequests than they are as a retirement income vehicle.”
- Basic-rate income tax could straightforwardly be levied on all funds that remain in pensions at death. At present, any payments to beneficiaries of pension death benefits are subject to income tax, but only if the pension owner was aged 75 or over at death. Under today’s rules that can mean benefits escape tax on death before age 75 or if the recipient in a non-taxpayer, e.g. a minor child.
- Pension pots should be included in the value of estates at death for the purposes of inheritance tax (IHT). With a few technical exceptions, there is no IHT on pension death benefits, regardless of age at death or the beneficiary.
The IFS recommends that reforms of the system should be announced “as swiftly as practical”. In practice, any immediate change is unlikely, given that it was a Conservative Government that introduced the 2015 changes. It was also not so long ago that Rishi Sunak, in his then role of Chancellor, dismissed a raft of IHT reforms proposed by the Office of Tax Simplification.
All of which means that, for now at least, you may want to review the role your pension plans play in your retirement and ensure you have made the right choice(s) in nominating the beneficiaries of your pension death benefits.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
10th February 2023