Beneficiaries could see inherited pensions taxed as new proposals by HMRC are published

Currently, if someone dies before the age of 75, their pension can be drawn out by beneficiaries’ tax-free, as it is exempt from Inheritance Tax and Income Tax if it is under the Lifetime Allowance (LTA).

But HM Revenue & Customs (HMRC) is proposing that these pensions are no longer excluded from marginal rate Income Tax from 6 April 2024, in what is being dubbed as a ‘death tax’.

What impact would this have?

The proposals were discussed in the documents covering changes to the LTA which is being formally abolished in 2024.

This change is a wholly unexpected one as many view pensions as an efficient inheritance plan. The inherited money could be invested and grown, all with the knowledge that it is a source of tax-free income.

In the proposals for the removal of the LTA, the Government has explained how inherited pensions will be taxed when taken as income instead of a lump sum.

This means beneficiaries would need to take the inherited pension in one amount and invest/manage the money themselves for it to remain tax-free.

The abolishment of the LTA is reportedly a method of removing disincentives as they want to keep ‘experienced people in work’ and that the allowance had been ‘disincentivising them from working’.

Experts believe that these new proposals will only cause more beneficiaries to take a lump sum instead of income or even result in people taking pensions early so that loved ones do not need to pay Income Tax later.

There is also uncertainty around whether this will impact those who have already inherited pensions and can currently withdraw this without incurring Income Tax, will then become subject to this new policy if it goes into effect.

For more information on how this new proposal would impact you, get in touch with us today.