Pension pots hit with inheritance tax raid from October
Pension pots could be hit with an inheritance tax raid under the Labour Party government. Pensions could be liable for inheritance tax under rumoured proposals from Chancellor Rachel Reeves, who will deliver the Autumn Statement on October 30.
Becky O’Connor, the director of Public Affairs at PensionBee, warned: "Bringing defined contribution pensions into someone’s estate for inheritance tax purposes would remove a key advantage that pensions have over other forms of long-term investment for those who are focused on tax efficiency.
"Income tax is already due on pension income for those who pass away after the age of 75. Making pensions liable for inheritance tax too could start to make them less attractive from a planning point of view and potentially dissuade people from saving into them."
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"Our own research indicates that this change wouldn’t be very popular amongst savers, with 51 per cent expressing that they plan to, or already have moved money into their pension to reduce the size of their estate," O'Connor added. Many think tanks have also called for pension pots to be brought into the orbit of inheritance tax, which the IFS estimated could raise hundreds of millions.
Under current rules, pension pots are not counted as part of the estate for inheritance tax unlike housing wealth or other savings. Ms O'Connor said: "Instead, a significant proportion of savers (60 per cent) stated that they’d prefer if inheritance tax was scrapped altogether."
Tom Selby, director of public policy at AJ Bell, said: “The country remains in the dark on where exactly the axe will fall. Like nature, politics abhors a vacuum, and the lack of clarity has led to inevitable speculation about possible revenue-raising reforms to pension tax relief and tax-free cash, as well as Capital Gains Tax.
“The fact the Government has boxed itself in by ruling out increases to the rates of income tax, National Insurance (NI) and VAT; insisting it will not raise taxes on ‘working people’; and saying its key economic priorities are growth and wealth creation further confuses the picture. It is hard to see how the Chancellor can raise the money she says she needs without undermining at least one of these pledges.”