Home Money Reeves inheritance tax raid puts millions at risk of poverty in old age, warns ROS ALTMANN

Reeves inheritance tax raid puts millions at risk of poverty in old age, warns ROS ALTMANN

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Tax hoarding: Chancellor Rachel Reeves said in the Budget that from April 2027 pensions would no longer be exempt from inheritance tax

The explosive inheritance tax announcement in the Budget is a potential disaster for pensions.

It will mean less inflow of money, more early withdrawals, less investment of pension funds in long-term companies.

assets with higher long-term profitability and more pensioners dependent on state benefits.

This is eerily reminiscent of Gordon Brown’s 1997 removal of the dividend tax credit from UK pension funds which, as with this Budget, met with little industry opposition at the time.

It took several years to recognize this fatal blow to traditional final salary-type defined benefit (DB) pensions.

Removing the inheritance tax (IHT) exemption for unspent pensions could be equally damaging to the defined contribution (DC) schemes that replaced the once-thriving private sector DB arrangements, undoing the brilliant incentives of freedoms of 2015 by George Osborne.

Tax hoarding: Chancellor Rachel Reeves said in the Budget that from April 2027 pensions would no longer be exempt from inheritance tax

This removed requirements for DC pensioners to buy annuities (where insurers can pocket the pension funds of those who die, leaving nothing for heirs) or buy expensive retirement funds with a 55 percent death tax.

After 2015, people could take control of their pensions, feeling secure contributing more to invest for the long term and only withdrawing money when they wanted.

The tax system encouraged people to spend any other savings first, maintaining pension funds for their 80s and 90s (the original purpose).

The removal of the IHT exemption takes us back to the old days. There may be little sympathy for millionaires, but it is those near the middle who are most affected.

Most people underestimate their life expectancy, worry about dying relatively young, don’t want annuities and would prefer not to lose most of their pension investments to the taxman.

It’s not just a 40 percent tax on unspent funds. It’s much worse.

If the Chancellor’s proposals go ahead in 2027 as planned (and I hope they don’t, so please respond to the consultation), those who inherit pensions from anyone who dies after age 75 will face income tax on the withdrawals.

So HMRC takes 52 per cent, 64 per cent or 67 per cent of an inherited fund, depending on the tax brackets. This is more like a confiscation than a tax.

Consider someone with a pension fund of £500,000 (which could buy around £20,000 annual income from indexed pension annuities).

After taking tax-free cash, the remaining £375,000 could be withdrawn with 20 per cent tax, keeping annual income below £50,271, which is the 40 per cent threshold.

If they have a full state pension of £12,000, that leaves around £38,000 a year available at the basic tax rate. The fund could disappear in ten years.

A £400,000 fund could be up and running in less than eight years. People with average incomes who start withdrawing at age 55 would empty their funds much sooner.

Anyone who is already over state pension age can now consider withdrawing as much as possible straight away, to avoid the huge tax loss on death.

Commentators have not yet recognized how damaging this IHT change is. The Government plans to carry out further pension reviews, which will create even more uncertainty for long-term planning and again damage confidence in pensions.

Millions of people are at risk of falling into poverty in old age. The UK economy and markets will be affected as less investment is made in the long term. It’s time to wake up.

Don’t destroy DC pensions, leverage them to drive growth.

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