More than 12 million pensioners are anxiously waiting to hear whether Hunt and Prime Minister Rishi Sunak will suspend the state pension triple lock for the second year in a row. Now there’s a new worry.
Hunt and Sunak are drawing up plans to tax our pensions in other ways, and a top pensions expert is warning that they may be set to close a hugely popular pensions tax break.
Currently, Britons are free to pass on unused pension pots to their loved ones when they die, totally free of inheritance tax.
This is a hugely attractive tax break, given that the value of almost everything else we own is totted up on death, and counted as part of our estate for IHT purposes.
Any money that falls above the £325,000 nil-rate IHT band may then be taxed at a punitive 40 percent.
Families also benefit from an additional £175,000 main residence IHT allowance, but only when passing on their home to direct descendants such as children or grandchildren.
Now experts are warning that Hunt could scrap this generous tax treatment on death, in a move that would cause havoc with carefully laid inheritance plans.
The only obstacle stopping him is the furious backlash this would trigger, as the change would be dubbed a “pensions death tax”.
Tom Selby, head of retirement policy, said that under current rules defined contribution workplace and personal pensions benefit from generous tax treatment on death.
“If you die before age 75, you can pass on funds tax-free to your nominated beneficiary or beneficiaries.
“If you die after age 75, any beneficiaries will be taxed on the money in the same way as income when they make a withdrawal.”
Selby said charging IHT on the money would help slash the UK’s estimated £60billion budget black hole: “The Treasury could introduce a tax charge on death to raise extra revenue from retirees hoping to pass money onto loved ones tax efficiently.”
Yet Sunak would be brave to green light the move, which would unleash fury.
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For some, the ability to pass on funds tax-efficiently on death is one of the primary motivations for contributing to a pension, Selby said.
“Slapping a new tax on that money would leave many feeling the Chancellor has pulled the rug from under their inheritance plans.”
The only hope for pension savers is that the move would so “deeply unpopular” that Sunak and Hunt will back away. “Given the proximity of the general election, this might be enough to put Hunt and Sunak off going down this road.”
Yet pensioners should remain wary because Hunt is also considering a string of other pension tax increases, Selby said.
The most likely option would be to scrap higher rate tax relief on pension contributions, in a move that would hit five million.
Pensions tax relief for basic and higher rate taxpayers cost HM Treasury almost £50billion in the 2020/21 tax year. “Scrapping higher levels tax relief from 40 or 45 percent to 20 percent for everyone would potentially save around £10billion a year.”
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Selby said this would hit middle England voters directly in the pocket. “That’s a section of society the Conservative Party can ill afford to alienate.”
Hunt would risk standing accused of intergenerational unfairness, as older generations benefited from higher-rate relief while younger workers would not.
The most likely measure is to extend the freeze in the pensions lifetime allowance, a brutal 55 percent tax charge aimed at those who save too much for retirement.
This has been frozen until 2026, and Hunt is expected to extend this for another two years.
He could also reduce the pensions annual allowance, which limits the amount you can save into a pension and claim tax relief to a maximum £40,000 a year, or less for lower earners.
Nothing can be ruled out as Hunt considers his options ahead of the autumn statement on Thursday