Tax warning as HMRC buries detail in report on passing pensions to loved ones

Tax warning as HMRC buries worrying detail in report on passing pensions to loved ones (Image: GETTY) Proposed Lifetime Allowance policy changes could subject ‘many more’ people to taxation, an expert warns. Buried in HMRC ‘s new policy paper outlining the proposed measures to abolish the Lifetime Allowance is a proposal to make beneficiaries pay income tax on inherited pensions , even if the policyholder dies before 75. At present, people can pass on unused pensions to loved ones free of income tax if they die before age 75. If a person dies over the age of 75, only then will beneficiaries be taxed at their marginal rate. But this July 18th policy paper, entitled ‘Abolition of the Lifetime Allowance’, states: ‘Authorised lump sums and lump sum death benefits will be tested against a new threshold, set at the same level as the present Lifetime Allowance, £1,073,100.’ People will not pay tax where lump sums do not exceed this level, however, any lump sums paid above this level will be taxed at the person or beneficiaries’ marginal rate. Proposed Lifetime Allowance policy changes could subject ‘many more’ people to taxation (Image: Getty) Jon Greer, head of retirement policy at Quilter, commented: ‘On face value, it appears quite significant changes to the tax treatment of beneficiary pensions were put forward in a relatively underhanded way under the guise of removing the lifetime allowance from April 2024. ‘A single sentence at the end of a policy statement appears a rather odd way to announce a sea change in such a material aspect of the pensions tax regime. ‘It begs the question of whether the publication of this alongside the legislation was even intentional or whether it was a result of huge time constraints to release information by Legislation-day (L-day). Regardless, this is something that needs clarification sooner rather than later.’ The proposed policy changes will impact those who receive lump sum payments or death benefits from registered pension schemes, as well as those who have or intend to apply for Lifetime Allowance (LTA) or lump sum protections. On the face of it, Mr Greer said: ‘The changes put forward would subject many more people to taxation impacting beneficiaries of members who die pre-age 75 who left uncrystallised (unused) funds in their Defined Contribution (DC) pension pot.’ Mr Greer noted that currently, beneficiaries can choose to receive an income either by designating to drawdown or purchasing a beneficiary annuity and receive that income tax-free.’ If proposals are to go ahead, Mr Greer said: ‘The Government wants those beneficiaries to pay marginal rate tax from the next tax year. ‘This will impact any beneficiary who chooses beneficiary drawdown or annuity regardless of the size of the pension fund the member had accrued during their lifetime. It’s a sea change in tax treatment and could have a large political impact ahead of an election one would have thought.’ Commenting in response to the concerns, a Government spokesperson told Pensions Age magazine: ‘We want to keep 15,000 experienced people in work to help grow our economy and clear backlogs, such as seniors in the NHS who had told us that pensions tax was disincentivising them from working, which is why we have abolished the LTA. ‘We look forward to working with stakeholders over the coming weeks to help us craft the legislation which will ensure that our historical pensions tax cut delivers the right results for savers and the economy.’ What is the Lifetime Allowance? During Chancellor Jeremy Hunt’s Spring Statement in March 2023, it was announced the Lifetime Allowance (LA) would be fully abolished by the 2024/25 tax year. The Lifetime Allowance (LTA) seeks to cap the size of the fund that accrues during a person’s lifetime and for most people, is £1,073,100 in the tax year 2023/24. In previous years, people would have paid a Lifetime Allowance charge on any pension savings over this amount. From April 6, 2023, that charge changed to zero percent, with the Lifetime Allowance set to be abolished completely in April 2024.