Death tax: Government urged to clarify pension rules

Under current rules, where a saver dies after age 75, the inherited pension is taxed in the same way as income. 

But anyone who dies under age 75, can pass on untouched DC pension pots completely tax free, so long as their savings are under the lifetime allowance.

This tax break applies whether the money is taken as a lump sum or as a regular income. 

However, in a policy paper published this week, the government confirmed it was considering new rules which some experts claimed was a 'tax bombshell for untouched pension pots'.

These would mean when someone choses to take an inherited pension, the entire amount would be subject to income tax. 

Undoing LTA changes?

Tom Selby, head of retirement policy at AJ Bell, commented: “Creating a tax on death in this way makes little sense and may push more beneficiaries to take a lump sum when an income is more suitable for their needs. Or encouraging the member to take their pension benefits earlier than planned to avoid their loved ones paying income tax.  

“It also risks causing a political firestorm for the government and undoes much of the simplification benefits associated with ditching the lifetime allowance.” 

The rules are still to be finalised in legislation and at this stage it is not yet 100% clear exactly how pension assets will be treated on death.  

Although the government’s briefing note and subsequent newsletter suggests the introduction of the new ‘death tax’ for those who die before 75, this isn’t specified in the draft legislation tabled. 

Selby said: “This needs to be clarified urgently so pension savers can make informed decisions based on the planned rules.” 

Steve Webb, partner at LCP, added: “It would be totally unacceptable to make such a big change ‘through the back door’. If ministers plan to remove this pension tax break, they should announce their plans publicly and have them properly debated.”