The government said it was going to scrap the lifetime allowance, simply to let in more taxes by the back door in a move which is at best incompetent and at worst disingenous; and - whatever - it's just too confusing, argues Pension Expert's editor Samantha Downes.
If it's true that the only things certain in life are death and tax, then it's almost certain that taxes will always go up.
When governments can't - or probably shouldn't - put them up - they then will always find ways to make new ones. Slotting them in under pages of proposals or plans, and hoping no one notices.
So last week, some small print spotting found rules that would mean an inherited pension would be taxed, at income tax rates, if the saver dies before they are 75, are in the pipeline.
The small print, was uncovered in part of HMRC's consultation around the scrapping of the lifetime allowance.
LCP's Steve Webb and AJ Bell's Tom Selby have already pointed out this apparent taxation by the back door, both saying that plans to replace the scrapped pensions lifetime allowance will create a new ‘death tax’ for savers,'.
When Chancellor Jeremy Hunt said he was scrapping the lifetime allowance earlier this year, the pensions industry breathed a sigh of relief. While not many savers breach the allowance the accompanying 'checks and balances' that HMRC brings along with any taxation can create a nightmare whether someone breaches the allowance or not.
And they create another layer of administration for an industry already reaching a capacity crunch on at least two fronts.
Confusion, when it comes to taxation, can pay off, for the taxman at least - for example every year thousands of people get fined for not filling in their end of year tax return, even though they don't owe any extra tax.
In my experience it's those who need the cash the most who end up paying these stealth taxes.
In the run up to a general election, then tax is always fair game and of course there is the clamour to scrap inheritance tax (IHT), but it made up over nine per cent of the 2021/2022 tax take.
Hence HMRC may be eyeing pensions again?
Getting members to engage with their pension scheme is hard enough as it is, if the LTA really is being replaced by another tax - as is now being reported in the national as well as the trade press - then the job of pension funds and anyone who really believes we all need to save a lot more for our retirement can only get tougher.
'New death tax': What are the changes
If someone dies before age 75, their pension can be inherited completely tax-free if taken as income. However, the government is considering new rules, where someone dies before age 75 and they choose to access as yet untouched inherited pension as income, the entire amount would be subject to income tax
By contrast, if the same person took the inherited pension as a lump sum and it was within the £1,073,100 lump sum limit, it would remain tax-free
Tom Selby, head of retirement Policy at AJ Bell, said the decision to scrap the lifetime allowance had the potential to be a hugely positive step in making pensions simpler for millions of people and ditching a significant disincentive to save for their financial future. It will still provide a big boost for pension savers, however the government is at risk of tying itself in knots by creating two new lifetime limits for pensions (see ‘Background’ section for more details).
“But, bizarrely, not content with this confusion, the government is considering going further and adding even more complexity to the new rules by creating a new pension ‘death tax’ where someone dies before age 75.
“Under current rules, if you die before age 75 and haven’t yet accessed your pension, your beneficiaries can inherit your defined contribution (DC) pension completely tax-free if it is under the lifetime allowance. However, the government has confirmed it is consulting on whether to apply income tax to these pensions if taken as income.
“If an inherited pension that hasn’t been accessed is taken as a lump sum, provided the deceased person hasn’t used up their £1,073,100 ‘Lump Sum and Death Benefit Allowance’, their loved ones will still be able to inherit the pension tax-free. Where there is an excess over this limit, that excess will be taxed in the same way as income.
“But if the inherited pension is taken as income, the entire withdrawal could be taxed as income. Creating a tax on death in this way makes little sense and may push more beneficiaries to take a lump sum when an income is more suitable for their needs."
