Pension savers fear retirement pots will be hit by Inheritance Tax changes next week | Personal Finance | Finance

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Pensions may be targeted as a new source of income for Inheritance Tax (IHT) purposes in the months ahead. According to new research from interactive investor, the impact of this is what retirees fear the most ahead of Rishi Sunak’s upcoming Budget.

Pension worries

As the Chancellor prepares to announce the Autumn Budget next week, a poll from interactive investor highlighted which potential tax changes are concerning pensioners the most. The biggest concern among self-invested personal pension holders is making a pension subject to inheritance tax on death, with four in 10 (40 percent ) respondents to the poll saying this was a worry for them.

Additionally, the same poll showed retirees fear a reduction or limit on the amount of tax-free cash available to people when they access their pension for the first time, a reduction in the Lifetime Allowance and a reduction on contribution tax reliefs.

Becky O’Connor, the Head of Pensions and Savings at interactive investor, commented: “This poll reveals a significant proportion of people worry about potential changes to pension taxes and could be affected by any reductions or restrictions.

“The allowances and reliefs that come with pensions make them the most attractive way to invest for retirement. If the Chancellor feels tempted to tap that vein, he risks people giving up work without enough in their pensions for a decent income because they are worried about being hit with charges, or because pensions begin to lose their attractiveness relative to other ways to invest for the long term.

“The ability to pass on what’s left in a defined contribution pot tax-free is a key benefit of this type of pension and a kind of consolation for the loss of generous old-style defined benefit schemes that offer guaranteed income for life, but in general no ability to pass anything on to relatives.”

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Rishi Sunak and the wider Government have confirmed the state will be looking to cover the costs of coronavirus over the coming months and years. However, in doing so the Government has promised to introduce fair and proportionate measures.

Despite this, potential pension and/or tax changes could hit workers across the spectrum. Ms O’Connor explained: “Reducing the amount of tax-free cash available would affect everyone with a pension and would therefore be deeply unpopular and the effects widely felt, although could be justified from the point of view of dissuading people from taking out too much, too soon from their pension.

“A reduction in the Lifetime Allowance sounds like a nice concern to have, but over time, with investment growth and inflation, more and more people who have been lucky enough to get generous pensions through work or have saved diligently – not just the wealthy – will be affected by this limit, beyond which a tax charge is payable.”

Ms O’Connor concluded by noting retirees will be awaiting next week’s Budget “with some nervousness” and according to additional insight from other experts in the field, IHT fears may be well founded.

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Inheritance Tax and pensions

Under the current rules, if a person dies before the age of 75, they can pass on defined contribution personal or workplace money-purchase pensions to loved ones free of income tax or IHT, provided payments are made within two years of death. However, recent analysis showed Mr Sunak could impose IHT charges on these pensions in a move which could raise funds for the Government’s struggling coffers.

Speaking with Express.co.uk previously, Carl Emmerson, deputy director at impartial think tank the Institute for Fiscal Research, noted these pension tax breaks were “indefensibly generous” and “very, very beneficial”, and called for them to be reviewed.

Mr Emmerson said it was “unfair” to allow families to use their pensions to pass on wealth free of IHT, given they’re primarily designed to save for retirement.

Additionally, Sean McCann, chartered financial planner at NFU Mutual, warned Mr Sunak could target these pension rules next week.

“Earlier this year, the Chancellor froze IHT allowances for five years, a decision that will earn him more money as asset prices rise,” he said.

“If Mr Sunak wanted to cast his net further, he could make the bold decision to make pensions liable for IHT, raising significant sums in the process.”

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, also said charging IHT on pensions “would go down like a lead balloon with the public and go against the ethos of freedom and choice.

“Much has been made of the ability to pass on pensions free of IHT and in some cases income tax. Any change risks pulling the rug out from under their plans.”

Currently, IHT is typically levied on the estate of someone who has died and is passing on their assets. IHT is only charged where a person’s estate is valued over £325,000.

Usually, there will be no IHT to pay if the estate value is below this threshold or, the estate owner leaves everything above the £325,000 threshold to a spouse, civil partner, a charity or a community amateur sports club. Where IHT is due, it is charged at 40 percent.

However, this 40 percent is only charged on the parts of the estate valued higher than the £325,000 threshold. So, for example, if an estate is valued at £350,000, 40 percent will only be levied on £25,000.

An estate can also pay IHT at a reduced rate of 36 percent on some assets if the holder leaves 10 percent or more of the “net value” to charity in a will.

Where IHT is due, payments must be made by the end of the sixth month after the person died. This is important to note as HMRC will start adding interest to the debt if payments are not received by the due date.

Full details on IHT can be found on the Government’s website and impartial advice can be sought from the likes of Citizens Advice and Money Helper.





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