Fears of second “death tax” blow for the bereaved | Personal Finance | Finance
Small print buried in the budget has raised fears of a second blow to the bereaved linked to inheritance tax.
The Chancellor has announced a decision to end an inheritance tax exemption for pension pots passed on if an individual dies before the age of 75, which could cost grieving families hundreds of thousands of pounds.
On some calculations people who receive a pension pot as an inheritance could lose as much as 67 percent of it through a combination of the death tax and income tax.
However, there are concerns that Rachel Reeves is also look at another method to grab cash in the event of a death, which involves death in service payments.
These payments, which can be as much as four times annual salary, are usually a lump sum paid to named beneficiaries of a worker who dies while on the company payroll.
Often administered as a pension scheme, the payouts – which can be as much as four times the worker’s annual salary – may be caught by Labour’s tax raid on pensions.
Following the budget, finance experts say there is a possibility that the government will take a share of the payment, depending on how it is administered.
Some schemes make death in service payments from a group life insurance policy held in trusts, and therefore not within the scope of inheritance tax on that basis.
However, other schemes make death in service payments as a pension lump sum payment, which will be in scope of the tax. This includes the police pension scheme, meaning that the families face losing as much as 40 percent of the money they receive. They would then also pay tax based on their own income tax rate on any of the cash.
The Police Federation of England and Wales spokesman said it is “aware” of the changes and is considering how it will affect their pension schemes.
Ros Altmann, a former pensions minister under David Cameron, told the Telegraph: “It will obviously have some knock-on unintended consequences on people who die unexpectedly soon on a company scheme which for many of our public servants of course they should have good pensions.
“If they are told suddenly their death in service benefit is worth 40 percent less than they would have ever dreamed, then those in particularly dangerous public service may think twice about carrying on with their jobs.”
Local government death in service payments will also be subject to inheritance tax from 2027, according to Unison. A spokesman for the union said it is now pushing for clarification as to how the change will affect death in service benefits.
Treasury documents listed the death benefits that are now within scope for inheritance tax. They include defined benefits, lump sum death benefit, the lump sum beneficiaries can withdraw from a drawdown fund, and lump sums given to beneficiaries from annuities of someone who has died.
The Government has launched a three-month consultation on how the change will work, as experts have already warned it will be a “bureaucratic nightmare” to administer.
Initial proposals suggest bereaved families will need to track down all of the deceased’s pensions, contact each scheme individually and calculate the inheritance tax bill themselves.