Pension savers will be forced to navigate a “horribly complex” new set of rules in 2024, warns AJ Bell, as the Government prepares to unveil new plans to replace the pensions lifetime allowance.
In March, Chancellor Jeremy Hunt abolished the pensions lifetime allowance of £1,073,100, creating a tax regime where consumers can take as much income as they want from their pension, subject to income tax.
The Finance Bill, expected to be published shortly after the Autumn Statement later this month, will set out new rules to replace the lifetime allowance from 6 April 2024 and could create a new ‘death tax’ for savers.
Under current rules, if a person dies before age 75, their beneficiaries can inherit their defined contribution pension tax-free if it falls under the lifetime allowance. However, under the new pension tax regime, it is expected that all inherited pensions taken as income will be taxed, regardless of what age the person passes away. According to AJ Bell, the proposals are arguably “more complex” than the old lifetime allowance rules.
Tom Selby, head of retirement policy development at AJ Bell, said the move would be a huge shift in policy, backtracking on flagship reforms introduced by former Chancellor George Osborne alongside the pension freedoms.
Selby said: “The decision to scrap the lifetime allowance has the potential to be a hugely positive step in making pensions simpler for millions of people. But the government is in danger of undoing its good work by creating a horribly complex new set of rules.
“Creating a death tax if income is taken makes little sense and may push more beneficiaries to take a lump sum when an income is more suitable for their needs. As we wait for the Finance Bill to be published, it is not yet 100% clear exactly how pension assets will be treated on death. This needs to be clarified urgently so advisers can help their clients make informed decisions.”
It is also unclear whether funds that have already been accessed before death will be taxed differently to those that have yet to be accessed.
The Finance Bill is expected to receive Royal Assent only weeks before the start of the new tax year, leaving advisers, clients and schemes making changes based on draft rules, said AJ Bell.
Rachel Vahey, head of policy development at AJ Bell, commented: “If the government sticks to its start date of 6 April 2024, this leaves, at most, just over 90 working days until the new rules kick in. Achieving good consumer outcomes is at the forefront of everything advisers and providers do. By bringing in substantial changes at such short notice, the government risks creating consumer confusion and the possibility they rush to make decisions which are not in their best interest.”
Vahey said the decision to forge ahead with new rules before the general election shows a desire to prioritise creating a legacy over good consumer outcomes and urged the government to focus on giving consumers, providers, advisers and itself more time.
Vahey also called for greater clarification around the rules for those pension savers who have already taken some of their pension before 6 April 2024 but still have some untouched funds.
“Pension schemes and advisers are eagerly awaiting transitional rules for these people, explaining how to measure benefits taken over the two different tax regimes, The draft legislation published in July only had ‘to be confirmed’ written.
“It’s important these rules are kept as simple as possible. Advisers and their clients only have a few weeks to make the best decisions for clients’ financial futures, so the rules need to be easy to understand and appropriate,” she added.
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