Pension warning: Fears Treasury quietly scrapping family pension tax break
A Treasury source has looked to reassure the public that plans are "not a done deal."
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The Treasury has faced backlash over plans to axe a tax exemption on pension pots passed down should the pensioner dies under the age of 75.
The proposals emerged as part of a bumper pack of documents, published hurriedly as the Treasury looked to get its ducks in a line before recess.
Eagle-eyed experts spied the plan and raised the alarm over a “ticking time bomb” for families on modest incomes.
Sir Steve Webb, partner at the consultants LCP, told The Express: “The small print of these proposals contains a ticking time bomb for people planning their family finances.
Work and Pensions Secretary Mel Stride (left) and Chief Secretary to the Treasury John Glen leave 10 Downing Street, London, for a Cabinet meeting on Tuesday June 27, 2023.
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“If there is not a big response from the public to this consultation, the Government will go ahead with a change that could result in a tax hike for people on modest incomes who inherit a pension pot.”
Untouched pensions can currently be passed on without triggering inheritance tax, with beneficiaries becoming subject to income tax if the pensioner dies after the age of 75.
Reforms introduced nearly a decade ago meant the pots of those passing away under the age of 74 could be transferred without income tax being imposed on withdrawals.
As such, the heir could inherit the pension and allow it to grow before withdrawing funds tax free.
The proposals could cause a headache to those with little time on their hands to plan
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However, new Treasury proposals eye up scrapping the tax break from April next year, meaning recipients would be required to withdraw the inheritance as a cash lump sum to keep it tax free.
Sir Steve, a former pensions minister, said: “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.”
A Treasury source responded: “This is not a done deal. The document only outlines one suggested approach as to how lump sums could be taxed in the absence of the lifetime allowance.”
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Campaign group Silver Voices have raised awareness of the heightened impact on spouses.
The group’s director, Dennis Reed, said: “If the main breadwinner dies, the other spouse or partner should inherit the pension.
“It’s extremely unfair and I feel for those who are bereaved and assume they will inherit the pension pot without income tax.”
Baroness Altmann said: “It seems to make good sense to remove the anomaly between those who die before and after age 75.
“The pensions still pass on free of tax to the inheritors but if they take some money out they pay tax at their marginal rate. Pensions are a brilliantly tax efficient way to provide for later life .”