In one of the latest responses to the UK government’s plans for inheritance tax on pensions, Kate Smith, head of Pensions at Aegon warned one aspect is “riddled with issues”.
She 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. IHT 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. For example, the first £100,000 of unused pensions on death would be inherited free of the new pension tax charge. This also has the added benefit of avoiding encouraging individuals to run-down their pension too quickly to avoid an IHT charge.
“If HMRC does proceed with its proposals and tries to retrofit pensions into the IHT regime we believe a number of fundamental changes are needed. First, Pension Scheme Administrators and Personal Representatives need to be given much longer than the standard 6 months IHT deadline to gather all the necessary information and calculate any tax liability for what can often be multiple pension arrangements.
“Second, we strongly believe all ‘death in service’ benefits should be outside of scope. These are designed to provide a lump sum or income for beneficiaries, commonly financial dependants, on the untimely death of the individual, often before the minimum normal pension age. There’s no suggestion these can be used to avoid Inheritance Tax.
“As a whole, IHT is designed around a number of exemptions and thresholds, specifically the nil-rate band of £325,000 and the spouse exemption for legal spouses and registered civil partners. This enables these individuals to inherit significantly more, after IHT, than other potential beneficiaries, such as common-law partners or children who may be financial dependants.
“Given the steady decline in opposite-sex marriage, the increase in co-habitation, and the number of children born to unmarried parents now exceeding the number born within a marriage, we believe this is out-of-step with today’s societal norms. In the longer term, we urge the Government to carry out a review of IHT so that it reflects modern day realities.”
