AJ Bell has urged the government to rethink inheritance tax on pensions, warning it will create huge complexity.
In an open letter to Chancellor Rachel Reeves and the Treasury department, AJ Bell has outlined flaws in the proposal to subject unspent pension assets to IHT on death.
The proposals mean that any unspent pension assets on death will be treated as part of the individual’s estate and may be subject to IHT. Once passed to the beneficiary, income withdrawn from the pension can then also be subject to income tax at their own marginal rate.
The double taxation means that pension assets will be subject to a 64% effective tax rate on death where the pension pot exceeds the IHT nil rate band and the beneficiary is a higher rate tax payer.
The plans, announced in Reeves’ inaugural Budget, are currently under consultation but not expected to come into force until 2027.
AJ Bell is calling on the government to consider alternative options, which it said would be simpler and fairer.
The investment platform has proposed either using a system similar to the current treatment of ISAs on death or simply relying on income tax at the beneficiaries’ margin rate.
Michael Summersgill, CEO of AJ Bell, said: “The proposals set out by the government create huge complexity and will delay families from accessing money in a timely fashion following a bereavement. In some cases the proposals will be unworkable and will create financial gridlock in the probate process, especially where assets held in the pension cannot be sold quickly.”
Summersgill said the fact that the proposals could result in millions of people paying a minimum tax rate of 64% on inherited pensions is likely to dent confidence in pensions.
AJ Bell also warned that the proposals could result in liquidity issues due to pension funds holding illiquid assets, something both the government and FCA are specifically trying to encourage.
“We’re urging the chancellor to instead consider alternative proposals from the industry, which would be fairer and simpler, without undermining her plan to tax unused pensions on death,” Summersgill added.
