AJ Bell: Inheritance tax changes risk ‘fundamentally undermining’ pensions system
The government risks “fundamentally undermining” the pensions system if it pushes ahead with planned changes to the taxation of inherited pension pots, the boss of AJ Bell warned.
In last month’s Budget, the government confirmed that inherited pensions will be subject to inheritance tax from April 2027, whereas previously they could be passed on tax-free.
The Treasury’s estimates suggest that the move would raise nearly £1.5bn annually by 2030.
But Michael Summersgill, chief executive of the retail investment platform, said the proposed changes were “arguably the most complex and costly way of raising tax from unused pensions on death”.
“If the government presses ahead with the proposals as written, it will risk fundamentally undermining the UK pensions system,” he wrote in a letter to the Chancellor, reported by the Financial Times.
As a result of the changes, Summersgill argued that higher-rate taxpayers would end up facing an effective tax rate of 64 per cent on the inherited funds, because they would be subject to both inheritance and income tax.
Recipients could also face delays in receiving the savings, since unused pots would have to go through probate before being distributed from April 2027.
“At what will be an emotionally challenging time for those close to the deceased… the process of distributing much-needed support will end up stalled in a much more complicated probate process,” Summersgill wrote.
Rather than push ahead with the plans, he suggested the government should get rid of a loophole which enables beneficiaries to avoid income tax on a pension pot if the pensioner dies before 75.
A Treasury spokesperson said: “We continue to incentivise pensions savings for their intended purpose of funding retirement instead of them being openly used as a vehicle to transfer wealth.”
AJ Bell was contacted for comment.