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Rachel Reeves’ plan to levy inheritance tax on pensions will “undermine” the retirement financial savings system and danger leaving beneficiaries with increased prices and prolonged delays earlier than receiving their cash, UK wealth managers have warned.
In a letter seen by the Monetary Occasions, Michael Summersgill, chief government of funding website AJ Bell, advised the chancellor that the Funds proposal was “arguably essentially the most complicated and dear manner of elevating tax from unused pensions on dying”.
“If the federal government presses forward with the proposals as written, it’s going to danger essentially undermining the UK pensions system,” he warned, noting that there have been “less complicated” methods for the Treasury to lift cash by way of the retirement financial savings system.
The federal government mentioned within the Budget that from April 2027, pensions would not be exempt from inheritance tax — a transfer that might elevate nearly £1.5bn a yr by 2030, in line with official estimates.
The modifications will consequence within the “double taxation” of unused pension funds on dying after the age of 75 as a result of retirement pots shall be topic each to inheritance tax (IHT) and earnings tax.
Summersgill mentioned the modifications risked leaving higher-rate taxpayers paying, in impact, a fee of 64 per cent on an inherited pension. He additionally warned that beneficiaries may face delays in receiving the pension cash, since unused retirement pots must undergo probate earlier than being distributed from April 2027.
“At what shall be an emotionally difficult time for these near the deceased . . . the method of distributing much-needed assist will find yourself stalled in a way more sophisticated probate course of,” he advised Reeves.
The warning comes as wealth managers that supply pension recommendation corresponding to AJ Bell, Hargreaves Lansdown and Quilter rush to rethink retirement savings plans.
The federal government’s proposals would require pension suppliers to make use of a “private consultant” of the deceased pension proprietor to calculate how a lot of their pot might be exempt underneath the nil-rate band — the quantity of an property that’s free from inheritance tax.
However this additional administration would elevate prices, Summersgill warned, including that finishing the method in six months — the time restrict for paying inheritance tax — would “not simply be troublesome” however “in lots of circumstances . . . show not possible”.
Delays could be more than likely when the deceased had not left a will and had a number of pension pots from a number of employers. Pension funds that maintain hard-to-sell investments may exacerbate delays.
As an alternative of bringing pensions throughout the IHT regime, Summersgill referred to as on Reeves to scrap a quirk within the system the place beneficiaries shouldn’t have to pay earnings tax on the proceeds if the pensioner dies earlier than the age of 75.
Helen Morrissey, head of retirement evaluation at Hargreaves Lansdown, the UK’s largest “DIY” funding website, mentioned: “If the method takes longer than six months to pay the inheritance tax invoice then HM Income & Customs will begin to cost curiosity, which is able to add additional complications for households at what’s already a particularly troublesome time.”
Jon Greer, head of retirement coverage at Quilter, mentioned that whereas the present rate of interest on excellent IHT was 7.25 per cent, it had beforehand risen as excessive as 7.75 per cent.
“At current, pensions provide vital tax advantages, and pulling the rug out from underneath those that have deliberate their futures based mostly on the present framework feels retrospective and unfair with out some type of transition,” he mentioned. “The federal government should strike a stability between simplification, equity and operational feasibility.”
A Treasury spokesperson mentioned inherited pensions shall be topic to “inheritance tax as soon as and, if due, earnings tax as soon as, as is the case with different financial savings”.
“We proceed to incentivise pensions financial savings for his or her meant objective of funding retirement as a substitute of them being overtly used as a automobile to switch wealth.”
