Pension experts are calling for a massive cut in death benefit pension tax changes in response to a call from the government to help with making the tax fairer for families.
Chancellor George Osborne flagged he wanted to change the benefit charge in his Budget 2014 speech and has recently published a consultation paper asking for opinions about the proposed shake-up.
Currently, families have to pay a 55% tax charge on unused pension funds on the death of a saver – which the Chancellor believes can be too high a price.
Pension companies both on and offshore are expecting the figure to settle at around 40% to line up with inheritance tax rates after the consultation.
Pension tax triggers
The main pension triggers for the 55% payment are:
- When a person less than 75 years old dies, the 55% charge applies to any pension benefits that have been taken from the fund
- When someone aged over 75 years old dies, the 55% charge is applied to the remaining pension fund
One pension firm, Standard Life, wants to see the government change the tax charge for under 75s to 40% to align with inheritance tax rates.
“This would give most families a cheaper and fairer result,” said the company’s Julie Hutchinson.
Hutchinson explained that if the tax charge for pensions was changed, those with smaller estates would escape paying any tax on estates of up to £325,000 that included a pension pot, while those over the threshold would pay at a rate of 40%.
QNUPS and trusts under fire
Meanwhile, offshore pensions expert Gary Boal, of Boal & Co, based on the Isle of Man, reckons changing the tax charge will end the tax-efficiency of moving a UK onshore pension in to a Qualifying Non-UK Pension Scheme (QNUPS).
QNUPS were granted a specific exemption to avoid inheritance tax, but another consultation aimed at removing this benefit is under way – and Boal expects to see QNUPS move into the same tax regime as onshore pensions.
The consultations on changing inheritance tax rules for pensions also tie up with another consultation about trusts.
Currently, someone can have a number of trusts each with a £325,000 inheritance tax threshold, but the new proposals call for one £325,000 threshold for multiple trusts, bringing the rules into line with those for individuals.
Pension experts claim the government is launching a multi-pronged attack against inheritance tax avoidance by taking away many of the tax planning tools available to the wealthy.
