In April I wrote about how pensions can be a very effective estate planning tool and asked whether this might be the subject of future legislative change following the abolition of the lifetime allowance (LTA). In particular, I noted that where the pension holder dies before 75, there would be no income tax and no inheritance tax on their (post-Budget changes, potentially very large) pot - quite the boon for their beneficiaries!
This week the Treasury answered my crystal ball gazing by publishing a consultation under which all beneficiaries will, from April 2024, be charged to income tax on withdrawals from inherited pots, regardless of what age the pension holder died.
Does this make my April post redundant? Well no, pension pots can still offer a flexible means of passing assets on at a lower tax rate than non-pension alternatives. Compare Alex dying over the age of 75 in my post (an effective 45% tax rate), with the position of Catherine (an effective 63% tax rate). However, it will remove the massively valuable exemption from income tax for pensions where the holder dies before 75.
We are told this proposed change is in direct response to the scrapping of the LTA in the Spring Budget. Therefore, for the families of pension holders who die before 75, the position is now, ironically, worse than it would have been had the LTA been left in place.
A salutary lesson that for every silver lining tax break, there's a dark storm cloud just over the horizon!
The Budget’s changes have (i) increased the amount which can be contributed income-tax free each year (thereby opening up the possibility of building up even larger undrawn pots) and (ii) created an even bigger potential tax-free boon should the individual die before 75.
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