The Treasury has proposed that pensions will be taxed where the saver dies before age 75.

This is how the Treasury introduce the idea

Schedule 32 sets out that the payment of an UFLSDB or DBLSDB is a BCE where the member dies under age 75. For all lump sums/ lump sum death benefits which are BCEs, any excess over the individual’s available LTA was subject to an LTA charge. Finance (No. 2) Act 2023 provided that no new LTA charge would arise from 6 April 2023 and, where the LTA charge previously applied, made SIHLS, LTAELS, DBLSDB and UFLSDB taxable at the individual’s or beneficiaries’ marginal rate.

The language is so obscure that even expert advisers struggle in the fog.

Exactly – if nothing has changed, why does it say ‘will no longer’ be excluded from marginal rate tax? And we’re talking about uncrystallised funds at point of death.

— Steve Webb (@stevewebb1) July 19, 2023

One thing is clear – Steve Webb is right

It really shouldn’t need my colleagues to crawl over HMRC docs to uncover this – should have been a proper Treasury announcement of a change of policy: https://t.co/vKkPmhwWq2

— Steve Webb (@stevewebb1) July 19, 2023

And he’s created quite a stir – a truly excellent piece of work from LCP

It’s created quite a stir

I’m starting the clock running now for the Government U-turn on this one…. https://t.co/RERIGpQwxD

— Steve Webb (@stevewebb1) July 20, 2023

Here’s what LCP thinks HMT are saying

LCP explained the consultation was largely focused on the legal changes necessary to implement the abolition of the lifetime allowance (LTA) – the lifetime limit on tax-relieved pension pots.

But it said, whereas the LTA applies only to those with the largest pots, the new proposals would apply to anyone who inherited an untouched pension from a loved one who died under the age of 75 – regardless of the size of the pot. If implemented, the change would take effect from April 2024.

LCP said that, although more detail of the proposed legislation is to follow, the policy statement which accompanied yesterday’s announcement said: “Individuals will still be able to receive the benefits … but the values will no longer be excluded from marginal rate income tax under [the Income Tax (Earnings and Pensions) Act 2003], with effect from 6 April 2024”.

My understanding of this is that what is being lost is the right of the person who bags the pot to get the money without capital taxes and to be able to drawdown without income taxes. Wonderful as this is for the wealthy people who can defer drawing down, it is a flagrant example of the wealthy giving tax emptions they don’t really need.

Perversely, the current tax regime allows savers to defer spending pots to maximise tax-efficiency  but with no regard to the proper purpose of tax-relief – to protect the tax-payer from a saver living too long.

I’m not surprised or disappointed that HMT is chipping away at this loophole.

LCP explained that one advantage of the current system is that heirs can inherit money into a pension pot (eg a ‘beneficiary drawdown’ account) where it remains invested, grows tax free, and can be drawn out free of income tax at any time.

But it said, if the income tax privilege were to be withdrawn on this, the only alternative would be to take the inheritance as a cash lump sum. This would remain tax free but mean recipient would then have to make difficult decisions about how to invest this money and how to manage it over time, as well as no longer benefiting from the pension ‘wrapper’ with its associated tax breaks.

But we should join with the former pension minister when he remarks

“This tax advantage risks being abolished by next April if these new proposals are implemented.  It would be totally unacceptable to make such a big change ‘through the back door’. If ministers plan to remove this pension tax break they should announce their plans publicly and have them properly debated.”

Steve Webb