A decision to hit unused pension pots with death taxes will be a “slow-motion car crash”, investment fund chiefs are warning.
The move could mean that the HMRC grabs more than 60 percent of the value of some pension nest eggs in a tax double whammy.
This is because inheritance tax will be applied at 40 percent on any unused pension left to loved ones. On top of that the beneficiaries could be charged income tax on any receipts ranging from 20 percent to 45 percent.
The number of people hit by the Budget tax raid will be far more than those who lose out as a result of changes to inheritance tax rules around family farms, however they have not received the same attention.
The bosses of the savings and investment giants AJ Bell, Aegon, Hargreaves Lansdown say the move could severely affect the desire to save into a pension in order to pass on wealth.
Tom Selby, of AJ Bell, warned: “Government plans to bring pensions into inheritance tax risk turning into a slow-motion car crash, adding significant delays to the payment of money to beneficiaries, hiking costs, miring estates in complexity and creating the ludicrous situation where funds are effectively taxed twice if someone dies over the age of 75.”
Kate Smith, of pensions firm Aegon, said: “We do not support unused pension and death benefits being shoehorned into the inheritance tax regime, as this is unworkable and riddled with issues.
“Inheritance tax is already complex, and including pensions within the regime makes it even more so.
“We are asking HMRC to explore a simpler and more effective alternative that would keep any tax charges payable on death within the pensions regime, such as levying a tax on pensions in scope where above a certain level.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the plans would be a “significant financial burden” on beneficiaries and “an ongoing nightmare” for administrators.
She added: “We expected the Government to tackle the tax treatment of pension death benefits in the recent Budget, but bringing pensions into inheritance tax adds complexity and potential cost at a point when families are already under extreme pressure.
“Inheritance tax is to be paid six months after death – it can take years to find beneficiaries and during that time interest is being added to the inheritance tax bill.
“This can delay probate and mean that families are put under intolerable financial strain.”
Baroness Ros Altmann, a former pensions minister, said the “punitive” 40 percent inheritance tax rate is “more like confiscation than taxation”.
She added: “The current proposal is an existential threat for defined contribution pensions. It’s bonkers.
“It skews the incentives to save for retirement.
“Pension firms won’t know how much IHT to pay. It will be an absolute mess.”
Baroness Altmann urged the Chancellor to replace the current plan with a 20 percent flat rate of tax on pension wealth. This would reduce the incentive for savers to plunder their retirement pots in their 50s and 60s in order to avoid pension pots being taxed at 40 percent.
A Treasury spokesman said: “Inherited pensions will be subject to inheritance tax once and, if due, income tax once, as is the case with other savings.
“Most estates will continue to pay no inheritance tax. The first £325,000 of any estate can be inherited tax-free, rising to £500,000 if the estate includes a residence passed to direct descendants, and £1m when a tax free allowance is passed to a surviving spouse or civil partner.
“We continue to incentivise pensions savings for their intended purpose of funding retirement instead of them being openly used as a vehicle to transfer wealth.”
