Death tax 'wrinkle' means potential trouble for dependants
The government should consider allowing the pension pots of those who die before reaching age 75 to be transferred out, experts have said, although some questioned the likelihood of such a move.
Since April last year, defined contribution schemes that are uncrystallised or in drawdown can be passed on tax free if an individual dies before age 75.
The recipient of the pot then has the option to take the fund tax free, buy an annuity or continue in the scheme in income drawdown where it is offered. The recipient is not allowed to transfer away from the scheme to access drawdown elsewhere.
Media company Thomson Reuters recently opted to provide flexi-access drawdown in-scheme, but many schemes cite administrative complexity as a barrier to following suit.
The government’s only going to care about things that save it money or get more tax out of people… this is a problem for the [inheritor of the pot]
Nathan Long, senior pensions analyst at platform provider Hargreaves Lansdown, said: “It’s a disadvantage [because] they lose a bit of flexibility over their planning.” He added: “For small pots it might not be too much of an issue at all, they could take the pot out. When you get to bigger pots it’s a bit of a headache.”
Data from the Office for National Statistics show around 85,500 people aged between 20 and 65 die each year.
“An issue is looming on the horizon as thousands of families [are] locked out of the full pension freedoms and face losing more of any inherited pension to tax due to a wrinkle in the legislation,” Long said.
“Left alone, the position could get far worse; we anticipate the majority of employers yet to auto-enrol their staff into a pension will use Nest, which as yet has no drawdown offering.”
Reluctance to change
Long added it would be easier for the government to fix the issue than it would be for individual schemes to do so.
“Is knowledge of this quirk going to make trustees rush to put drawdown in place? Probably not. There’s nothing to stop the government.”
However, Anne-Marie Winton, partner at law firm ARC Pensions Law, said action was unlikely to be taken.
“The government’s only going to care about things that save it money or get more tax out of people… this is a problem for the [inheritor of the pot].”
She added employers were similarly unlikely to take action.
“[They] don’t want to allow huge amounts of flexibility within schemes because it’s an administration cost,” she said. “What employers want is people not in the scheme, they want them to go.”
She added: “I’m not sure who’s going to care enough to talk about it… trustees don’t tend to end up asking this question. It would have to come in as a member dispute.”
Richard Butcher, managing director at professional trustee company PTL, agreed. “The cost of delivering drawdown through your scheme is pretty high,” he said, adding that drawdown options available in the market are typically of a higher standard.
He said, however, that the government could make it possible for recipients to transfer to external drawdown vehicles.
“It’s just got to get on the government’s agenda,” he said.