Reeves’ estate tax raid puts millions at risk of poverty later in life, warns ROS ALTMANN
The announcement of inheritance tax in the Budget is a potential disaster for pensions.
It will mean less money coming in, more early withdrawals, lower investment by pension funds in long-term assets with higher returns and more pensioners relying on government benefits.
This is horribly reminiscent of Gordon Brown’s 1997 abolition of dividend tax credits from British pension funds, which, like this budget, faced little industry opposition at the time.
It took several years before this fatal blow to traditional final salary (DB) pensions was recognised.
Removing the Inheritance Tax (IHT) exemption for unspent pensions could be just as damaging to defined contribution (DC) schemes that replaced the once booming DB schemes in the private sector, eroding the brilliant incentives of the George Osborne’s 2015 freedoms would be nullified.
Tax grab: Chancellor Rachel Reeves said in the Budget that pensions would no longer be exempt from inheritance tax from April 2027
This removed requirements for DC pensions to purchase annuities (where insurers can pocket retirement funds from the dying, leaving nothing for heirs) or to purchase expensive withdrawal funds with a 55 percent death tax.
After 2015, people could take control of their retirement, feel secure and contribute more to invest for the long term, and only withdraw money when they wanted to.
The tax system encouraged people to spend all other savings first, preserving pension funds for the 80s and 90s – the original purpose.
Abolishing the IHT exemption takes us back to the bad old days. There may be little sympathy for millionaires, but those in the middle are hit hardest.
Most people underestimate their life expectancy, are afraid of dying relatively young, do not want annuities and would rather not lose the majority of their pension investments to the tax authorities.
This isn’t just a 40 percent tax on unused resources. It’s much worse.
If the Chancellor’s proposals go ahead as planned in 2027 (and I hope they don’t, so please respond to the consultation), those who inherit a pension from anyone over the age of 75 will have to pay income tax on withdrawals.
So HMRC takes 52 percent, 64 percent or 67 percent of an inherited fund, depending on tax bands. This is more like confiscation than taxation.
Take someone with a pension fund of £500,000 (which could buy around £20,000 of annual indexed pension annuity income).
After taking tax-free cash withdrawals, the remaining £375,000 could be withdrawn at 20 per cent tax, by keeping annual income below £50,271, which is the 40 per cent threshold.
If they have a full state pension of £12,000, that leaves around £38,000 a year available at the basic tax rate. The fund could be gone within ten years.
A £400,000 fund could be funded in less than eight years. Middle-income earners who start withdrawing at age 55 would drain their money much sooner.
Anyone who has already reached state pension age may now consider withdrawing as much as possible immediately to avoid the enormous tax loss upon death.
Commentators have not yet recognized how damaging this IHT change is. The government is planning further pension reviews, creating even more uncertainty for long-term planning, once again damaging pension confidence.
Millions of people are at risk of falling into poverty later in life. The UK economy and markets will suffer as there is less investment in the long term. It’s time to wake up.
Don’t destroy DC pensions, use them to stimulate growth.