A decision in the Budget to bring pension pots into inheritance tax threatens to leave middle income households in poverty in old age, it is claimed.
A former pensions minister and finance industry expert, Ros Altmann, said the move will seriously remove a key incentive for paying money into a private pension.
Under the existing rules, if a pension holder dies before the age of 75, their beneficiaries can typically inherit the remaining funds tax-free, whether as a lump sum or as income.
After age 75, the inherited pension is taxed at the beneficiary’s marginal income tax rate – 20 percent, 40 percent or 45 percent.
The changes announced in the October Budget mean pension funds left to beneficiaries could now be treated as part of the deceased’s estate for IHT purposes. This means they will be subject to the standard 40 percent tax rate above the £325,000 nil-rate band.
At the same time, the beneficiaries will also be taxed on the money they receive at their income tax rate of 20 percent, 40 percent or 45 percent.
The net effect is that the vast majority of a pension pot – in some cases more than 60 percent – could be effectively confiscated by the taxman.
Critics say the changes make it less attractive to saving into a pension, which is bad for individuals and the wider economy, because pension funds will have less to invest in UK businesses and infrastructure.
Ros Altmann argues the changes are a disaster for people who have done the right thing and saved into a pension throughout their lives.
She warned it is “horribly reminiscent” of a decision by former Labour chancellor and PM, Gordon Brown, to remove dividend tax credits from UK pension funds in 1997.
Writing in the Mail, she warned Rachel Reeves that the new death duty is “more like confiscation than taxation” and could “destroy” the pensions system.
Separately, the boss of City wealth manager Quilter has warned that the move risks “undermining savers’ confidence”.
Ms Altmann warned: “The bombshell Budget inheritance tax announcement is a potential disaster for pensions.
“It will mean less money going in, more early withdrawals, lower pension fund investment in long-term higher-return assets and more pensioners reliant on state benefits.
“Millions are at risk of later-life poverty. The UK economy and markets will suffer too as less pension money stays invested for the long-term. It’s time to wake up.”
She warns the pension changes proposed by Reeves mean many face a form of double taxation because the retirement pots of those dying over the age of 75 will be hit by both inheritance tax and income tax.
This would leave basic-rate taxpayers facing a levy of 52 per cent on an inherited pension fund while those on higher rates would pay 64 percent, or 67 percent.
Steven Levin, chief executive of Quilter, said: “This feels like retrospective taxation on those who planned based on current rules.
“The combined impact of 40 percent IHT and income tax could lead to marginal rates of 64 per cent or 67 per cent. This is unconscionable.
“Changing the rules soon after introducing pension freedoms risks undermining savers’ confidence.
“The proposed changes will introduce significant complexity into an already overburdened system. Grieving families will face significant stress and delays in accessing assets until probate is granted.
“There are alternative ways to determine how pensions are taxed that would avoid excessive tax rates and allow beneficiaries prompt access to funds.”
There has been a backlash from the finance and pensions industry against the proposals. For example, AJ Bell chief executive Michael Summersgill said: “If the Government presses ahead with the proposals as written, it will risk fundamentally undermining the UK pensions system.”
Rachel Reeves defended her measures while delivering the Budget, saying: “This is a moment of fundamental choice for Britain.
“I have made my choices. The responsible choices. To restore stability to our country. To protect working people.
“More teachers in our schools. More appointments in our NHS. More homes being built.
“Fixing the foundations of our economy. Investing in our future. Delivering change. Rebuilding Britain.”
