Government proposals to tax your , if you haven’t taken all the money out before you die, are disastrous.Currently remaining funds pass to your loved ones, free of , if you have not spent the money.
In future, however, if you have no spouse or civil partner, your loved ones will lose at least 40% and, if you are over 75, will have to pay income tax on withdrawals too. Well over half your fund, or even two-thirds of it, could be taken in tax. This looks more like confiscation than taxation.
The change incentivises taking money out quickly. As long as your total income is under £50,270, you could withdraw thousands of pounds a year from your late-50s, at only 20% tax.
Rachel Reeves is about to raid YOUR pension pot (Image: Getty)
Baroness Ros Altmann (Image: Chris McAndrew / UK Parliament )
Average earners may start taking money before stopping work and many others as soon as they retire.
Pension funds worth a few hundred thousand could be gone by their late-70s.
This will harm confidence in pensions and increase later life poverty, while also undermining Government hopes of more pension fund investment in long-term assets like UK infrastructure, small growth companies and social housing, which are desperately-needed to boost British growth.
Fewer people in their fifties will feel comfortable investing in long-term growth assets with higher expected returns.
They will be loath to commit money for 10 or 20 years.
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Another dreadful aspect of the Chancellor’s proposals is that death-in-service benefits will also pay IHT – meaning loved ones only get 60% of the amount expected. Such retrospective tax will up-end people’s careful planning.
The new rules will also cause administrative chaos, extra costs and significant delays, as pension providers will have to wait to be told how much IHT is payable before they release any money.
This usually takes many months and sometimes years, forcing long waits on loved ones, whereas currently the money is paid out quickly.
If the Government insists on taxing unspent pensions in order to recoup some pension tax relief, I suggest a more straightforward proposal.
A simple flat-rate 20% tax on death. This avoids delays, cuts administrative complexity, removes incentives for early pension withdrawals, It could encourage more money for long-term investments, preserve pension confidence and improve pensioner incomes.