PENSIONSANDSAVINGS.COM

• Government’s proposals for draconian inheritance tax on pension funds will be disastrous – there are much better ways to raise revenue, including a flat-rate 20% levy. 
• In her response to Treasury consultation taxing unused pensions, Ros Altmann warns of dangers in current proposals and suggests flat-rate 20% inheritance levy instead, giving simpler, fairer rules and less damage to future DC pension.
  

Ros Altmann’s response to the consultation makes clear that the current proposals will be disastrous for all involved in DC pensions. She makes alternative recommendations that will be much fairer and still raise revenue for the Treasury, without creating the havoc and long-term dangers entailed in the current proposals.

These proposals for imposing IHT on inherited pension funds will cause administrative chaos, huge delays for bereaved families, extra costs for all pension providers and long-term damage to future DC pensions, as people are incentivised to take the money out as quickly as possible to avoid the draconian death taxes.

Ros warns of the following dangers and expresses concerns that too few pension firms and advisers seem to recognise the long-term threats to DC pensions:

1. More people will spend all their pension before they reach old age, leaving more poorer pensions in future, damaging social and economic outcomes
2. Yes, the wealthiest will be less affected, but 85% of pensioners are on basic rate tax and they will be best advised to take out as much as possible up to the £50,000 a year band, at the 20% tax rate, to avoid losing 40% of it if they die unexpectedly young
3. Those in the middle are likely to have withdrawn their pension fund well before their eighties or nineties, which defeats the real purpose of pensions and tax relief
4. There will be less investment in long-term assets that Government wants pensions to support, meaning less growth and less money to boost companies and markets – people will not be willing to tie some of their money up for 20 years when they reach their late fifties now, because they may want to take money out sooner, so Government plans to get more DC investment in long-term less liquid assets will be hit
5. Imposing IHT on death-in-service benefits is also draconian, with such retrospective taxation undermining the position of families who thought they were provided for if the worst happens

Ros  Altmann recommends alternative proposals, that would still raise revenue, but be fairer, simpler and avoid incentives for early withdrawal, involve little administrative cost, allow quicker inheritance and  enable more long-term investment as people could once again be more confident of keeping money for their much later years.  The proposal she explains in her response is the following:

Simply levy a flat-rate 20% inheritance tax on all unused pension funds on death, regardless of age of death – the current distinction pre-and post-age 75 seems arbitrary and is a historical anomaly.

The advantages of this proposal would include:

1. It makes the whole administration complexity disappear, cutting costs and delays.  The pension provider will know how much tax to pay, can deduct at source and remit to HMRC, without needing to be told by a Personal Representative or Administrator how to split between other assets and the pension. The current proposals put pension scheme administrators in an impossible position – having to pay money within six months, incurring interest if the payments are not made, but not knowing how much is due unless they have been informed by the personal representatives, over whom they have no control.
2. It could remove the arbitrary age 75 cut off which is unfair on those who die just over age 75 – this arbitrary age cut-off is an anachronism left over from past regimes, but is hard to justify.
3. It will still bring in significant revenue without the damaging side-effects.  The 20% levy can be justified by the generous tax reliefs pensions receive over many years. Alternatively, there could be an option for inheritors to reclaim that tax if the estate has not used up its nil rate IHT band although this adds complexity. The proposal, however can bring in revenue without the damaging side-effects of the current proposals.
4. It could be levied on all inherited pensions, without waiting for information about IHT from the person’s estate. For maximum administrative simplicity and speed of inheritance, the tax could also be levied on those who might otherwise not have an estate that is liable to IHT as pension providers would deduct the money at source.
5. The 20% tax would remove the very early incentives for large scale pension withdrawals by those on middle incomes who can take out as much as possible to make their annual income up to around £50,000 at 20% tax – if the worst happens their heirs will just pay the 20% tax instead.
6. Money could more safely stay in pensions longer, increasing long-term investments and pensioner incomes. Elderly people will be better off in future and more assets can be invested in long-term, higher expected-return, growth boosting investments.
7. Revenue raised could eventually be earmarked to help fund social care: Ultimately, it is possible that the revenue from this 20% inherited pension tax, could form a national fund to pay for social care reforms over time.

 

Ros Altmann’s full Consultation Response is set out below:

Response to consultation proposing to levy IHT on unused pension funds from Baroness Ros Altmann CBE, in a personal capacity, as a pension professional working in pensions for over 40 years and former Pensions Minister.

 

High level comments:

Dangers of removing the IHT exemption:

Undermines the future of DC pensions and risks more pensioners reliant on the state in later life, which could mean lower long-term growth: I am seriously concerned that the imposition of inheritance tax on DC pension funds that remain unspent on death, could undermine the future of DC pensions over the longer-term.

Incentivise those around the middle or slightly above, with incomes under about £50,000 a year, to spend their entire pension fund as soon as possible and withdraw as much as they can at the 20% tax rate: The new system will incentivise everyone who has a moderate sized DC pension fund and not on high incomes in later life (either earning around average salary in their late 50s and 60s or having retired early) to take as much money as they can, as soon as they can, at the 20% tax rate.  If their income is, say, £20,000 or £30,000 a year, they can withdraw their tax free cash and then also £20,000-£30,000 a year more, paying only 20% penalty.  This will mean someone in their late 50s or early 60s, with a £400,000 pension fund, would have nothing left in it by the time they reach their mid-seventies. These people are unlikely to have money left in their pension funds by the time they reach their 80s and 90s, so the pension assets they built up, with the help of tax relief, will have become a spending pot for their early or pre-retirement years, leaving nothing when they need extra help if they live to a ripe old age.  Most people underestimate their life expectancy, so will be worried about keeping money in their fund and potentially losing the majority of it in tax.

Less investment in long-term assets that Government wants pensions to support, meaning less growth and less money to boost companies and markets: It will also mean that someone in their late 50s or 60s, will be less likely to want to invest in long-term, illiquid, higher expected return assets.  These are the types of assets that can best boost growth, and which the Government wants DC pension funds to increase their exposure to.

Pension advisers, IFAs and insurers are not recognising the dangers for the long-term: IFAs deal with higher income pensioners, but this is the minority.  I am worried about those below that level. The pensions industry has not seemingly recognised the dangers of this policy. Financial advisers or wealth managers may not be so concerned, as most of their clients will have incomes approaching or well over the £50,000 basic rate tax threshold, so they would not be as incentivised to take money beyond their tax free cash, although even for these individuals, paying 40% tax on the pension fund will be much less than the ultimate tax losses if they die beyond age 75.

Imposing IHT on death-in-service benefits is also a real problem: Firstly because of the fact that this retrospective taxation means people who had thought they had made careful plans in case they pass away, have had a retrospective tax imposed on them, without warning. Secondly, because of the delays and complexity of the calculations required, loved ones will face significant delays in receiving the money.  Children who may not be totally dependent but need extra help due to their bereavement (perhaps the grandparent used to provide free childcare for example) will lose out financially and be left without the money they might need, at the very time they are grieving the lost loved one.

My alternative proposal:

Levy a flat-rate 20% inheritance tax on all unused pension funds on death, regardless of age of death: The remaining fund can pass as a pension to the next generation or other loved ones and will only be taxable on withdrawal but can remain invested tax-free until that time.  This could start pension funds passing down generations too, as we know that most younger people have much less pension wealth than ideal.

This flat-rate deduction has several benefits:

1. Money stays in pensions longer, meaning elderly people better off in future: It removes the incentive for those without high incomes in retirement (only around 15% of pensioners pay more than basic rate tax) to take money out as quickly as they can at the 20% tax rate, thus avoiding the much higher tax rates if they die unexpectedly young.
2. It makes the whole administration complexity disappear.  The pension provider will know how much tax to pay, can deduct at source and remit to HMRC, without needing to be told by a Personal Representative or Administrator how to split between other assets and the pension. All the calculations show in your examples involve significant complexity and added costs and delays.
3. Ultimately, it is possible that this 20% IHT could form a national fund to pay for social care reforms over time.  The 20% comes off all pensions, regardless of the size of the rest of the person’s estate, clearly justified by tax relief received on contributions into the fund in past years.
4. This will still bring in significant revenue, and will also ensure tax is paid by those who might otherwise not have an estate that is liable to IHT.  This would be a specific tax on pension funds, recognising the nature of the deal – with tax exemption on the way in and tax payable on withdrawal.
5. The 20% tax would deter large scale pension withdrawals by those on middle incomes and would help providers cut costs of administration, while also ensuring that pension investment options can be more exposed to long-term growth-boosting assets, rather than locking down into bonds or cash, because people will be likely to take the money out quickly and will not have a time horizon extending into their 80s and 90s.

 

DETAILED RESPONSES TO INDIVIDUAL QUESTIONS

Question 1: Do you agree that PSAs should only be required to report unused pension funds or death benefits of scheme members to HMRC when there is an Inheritance Tax liability on those funds or death benefits?

Response: PSAs should report to both HMRC and PRs, and it should be up to those administering the estate and beneficiaries, not PSAs, to pay the tax.

 

Question 2: How are PSAs likely to respond if they have not received all the relevant information from the PR to pay any Inheritance Tax due on a pension by the 6-month payment deadline?

Response: PSAs will be in an impossible position, adding significant delays and costs to the whole scheme. They have to wait for the other administrators to do their calculations, they can’t really remit money without that information and the whole timeframe is far too short.

 

Question 3: What action, if any, could government take to ensure that PSAs can fulfil their Inheritance Tax liabilities before the Inheritance Tax payment deadline while also meeting their separate obligations to beneficiaries?

Response: I do not really think this is easily, if at all, achievable. They can’t pay money if they have not heard about the rest of the estate.

 

Question 4: Do you have any views on PSAs reporting and paying Inheritance Tax and late payment interest charges via the Accounting for Tax return?

Response: this is a dreadful idea.  It adds potentially significant costs and would be detrimental to future costs for scheme members. This should be up to the PRs, Executors or administrators of the estate.

 

Question 5: Do you agree that 12 months after end of the month in which the member died is the appropriate point for their beneficiaries to become jointly and severally liable for the payment of Inheritance Tax?

Response: They should be liable straight away, why should PSAs be involved in this way?

 

Question 6: What is the most appropriate means of identifying or contacting beneficiaries if either the PR or HMRC realises that an amendment is needed after Inheritance Tax has been paid? Should PSAs be required to retain the details of beneficiaries for a certain period?

Response:  If this is not changed, PSAs should just have to inform the PR and HMRC of beneficiary details

 

Question 7: What are your views on the process and information sharing requirements set out above?

Response: This adds complexity and misery where currently there is simplicity and fairness, at least for over 75s

 

Question 8: Are there any scenarios which would not fit neatly into the typical process outlined above? How might we address these?   NO COMMENT

 

Question 9: Do you have any other views on the proposal to make PSAs liable for reporting details of unused pension funds and death benefits directly to HMRC and paying any Inheritance Tax due on those benefits? Are there any feasible alternatives to this model?

Response: Reporting to HMRC and beneficiaries or PR is fine.  NOT paying tax when they rely on the PR anyway to tell them other information such as house or residual estate value