IFS suggest higher taxes on inherited pensions

zagfles

Normally the outpourings of "think tanks" are and should be ignored, by the public and politicians, but the IFS are perhaps an exception...they have a point, pensions are arguably a better vehicle for avoiding IHT than they are for providing a retirement income for some...

https://ifs.org.uk/news/overly-generous-tax-treatment-pension-pots-death-needs-be-swiftly-ended

https://ifs.org.uk/publications/death-and-taxes-and-pensions

MK62

Difficult to argue against the government doing this for fairness (in principle)........but then the IFS have suggested in the recent past that there are also several other things they should perhaps change, in principle, but haven't (IHT on pensions is just one of them)......

https://ifs.org.uk/taxlab/taxlab-key-questions/what-are-options-reforming-pensions-taxation

LHW99

Changing the rules probably will happen, although in my opinion the LTA should be abolished first, as it is (frequently) a penalty on growth.

It would also give the opportunity for the Government to get more tax in the long run.

There's a more basic account here

https://www.thisismoney.co.uk/money/pensions/article-11541599/Pensions-subject-inheritance-income-tax-IFS-claims.html

NedS

Please is anyone able to explain the rationale behind the differing income tax treatment of an inherited pension whereby the original pension holder dies before / after 75? Seems strange that those inherited pensions from a death before 75 should then be free from income tax when the assets are drawn. Tax relief has been given on the way in, so it seems reasonable that income tax should be payable on the way out, regardless of whom the beneficiary may be. I'm struggling to understand the rationale of why an inherited pension should be treated any differently, and why the arbitrary age of 75.

Albermarle

zagfles said:

Normally the outpourings of "think tanks" are and should be ignored, by the public and politicians, but the IFS are perhaps an exception...they have a point, pensions are arguably a better vehicle for avoiding IHT than they are for providing a retirement income for some...

https://ifs.org.uk/news/overly-generous-tax-treatment-pension-pots-death-needs-be-swiftly-ended

https://ifs.org.uk/publications/death-and-taxes-and-pensions

They said something similar before a previous budget ( can not remember which one).
To be fair I have never understood why if you die before 75, the beneficiary does not have to pay income tax on withdrawals. I can not see the logic in this. Presumably it would also be fairly easy to change this.

dunstonh

Please is anyone able to explain the rationale behind the differing income tax treatment of an inherited pension whereby the original pension holder dies before / after 75? 

Historical quirk.  The original rules were, that on death, the pension was paid out tax free and you had to buy an annuity by age 75.   So, by default, you only had lump sum death benefits before 75.   Original drawdown used to still require an annuity before 75.  The short lived flexible drawdown option brought in some fudged rules and the pension freedoms, continued to use the pre/post 75 as a measure (which applies equally to annuities as well as drawdown).

zagfles

LHW99 said:

Changing the rules probably will happen, although in my opinion the LTA should be abolished first, as it is (frequently) a penalty on growth.

There are lots of taxes on growth, CGT is specifically a tax on growth, IHT is often a tax on house price growth, dividend/interest taxes tax increases in savings/equity funds etc. So don't see why the LTA being a tax on growth is controversial.

The LTA could be abolished or phased out if they moved to flat rate relief for pension contributions - then the effective double taxation of higher rate taxpayers would approximately replicate the effect of the LTA.

zagfles

Albermarle said:

zagfles said:

Normally the outpourings of "think tanks" are and should be ignored, by the public and politicians, but the IFS are perhaps an exception...they have a point, pensions are arguably a better vehicle for avoiding IHT than they are for providing a retirement income for some...

https://ifs.org.uk/news/overly-generous-tax-treatment-pension-pots-death-needs-be-swiftly-ended

https://ifs.org.uk/publications/death-and-taxes-and-pensions

They said something similar before a previous budget ( can not remember which one).
To be fair I have never understood why if you die before 75, the beneficiary does not have to pay income tax on withdrawals. I can not see the logic in this. Presumably it would also be fairly easy to change this.

And they could do it without the accusation of retrospective taxation, since unless you know you're going to die under 75 you can't know your dependants would have got your pension tax free. If you do know you're going to die before then eg terminally ill there are rules against using a pension to avoid IHT. It's probably going to happen, at a time where there's a budget deficit and when the govt will want to avoid being accused of "austerity".

I think the reason for it and generally pensions being treated favourably for inheritance was George Osbourne really wanted to increase IHT thresholds, but in the coalition the Lib Dems wouldn't let him, then at a time of so-called "austerity" it wouldn't have been politically acceptable, so they allowed pensions to be used as a way to effectively increase IHT thresholds...

Albermarle

so they allowed pensions to be used as a way to effectively increase IHT thresholds...

So does the ability to 'hide' a DC pension pot from IHT calculations, only go back to the time of George Osbourne?

I thought it was because pensions are held in trust by the pension trustees, which has always been the case ?

I have no idea- just interested !

zagfles

Albermarle said:

so they allowed pensions to be used as a way to effectively increase IHT thresholds...

So does the ability to 'hide' a DC pension pot from IHT calculations, only go back to the time of George Osbourne?

I thought it was because pensions are held in trust by the pension trustees, which has always been the case ?

I have no idea- just interested !

The flexibilities made it a lot more practical to do so while not imposing too much restriction on the pensioner's own access to their money.

LHW99

zagfles said:

LHW99 said:

Changing the rules probably will happen, although in my opinion the LTA should be abolished first, as it is (frequently) a penalty on growth.

There are lots of taxes on growth, CGT is specifically a tax on growth, IHT is often a tax on house price growth, dividend/interest taxes tax increases in savings/equity funds etc. So don't see why the LTA being a tax on growth is controversial.

Although within a pension (which is what the IFS was considering I think) CGT isn't charged.

If the Government a) wants to have as few pensioners as possible dependent on means tested benefits and b) the chance to get an increased tax take, then I suppose abolishing the LTA, reducing the tax-free lump sum to 25% or a maximum of (say) £50k and making inherited pensions taxable on the beneficiary might fit the case.

It feels like pretty much everything else is taxed so I'm sure it will happen one day in the not too far distant future.