Tax-free pension loophole closed
The Budget has confirmed that the Revenue has closed a loophole which allowed pension funds to be passed on tax-free at death
Providers of small self-administered pension schemes (SSAS) had been marketing scheme pensions as a way of passing pension money onto family without tax since A-day. However, the government has clamped down on what it regards as an abuse of the rules. The change will apply to members who die on or after 6 April 2008.
The rules will treat any increase in the pension rights of one member following the death of another member - if the two members were connected - as an unauthorised payment. This means that there will be a tax charge of 70%, the same as applies to funds passed on via alternatively secured pension (ASP). The funds passed on will also be liable to inheritance tax bringing the potential tax charge to 82%.
The charge will not apply if the scheme has 20 or more members and the funds arising following the member's death are evenly distributed amongst all members of the scheme. This means that these rules will not impact on final salary schemes.
Andrew Tully, Senior Pensions Policy Manager at Standard Life, said: "This is a logical move which brings scheme pension inheritances into line with alternatively secured pensions. This creates a level playing field for ASP and scheme pensions. However the tax rate of 82% applied to inheritances under both seems unnecessarily punitive, and will not do anything to encourage more pension savings."
But Rachel Vahey, head of pensions development at Aegon, said: 'We are very disappointed the Treasury's has decided not to change the tax legislation to allow the development of 'hybrid' or mid-market solutions (products that offer guaranteed income where savers still benefit from any future investment returns).
"This is a missed opportunity to allow true innovation in retirement products to meet the needs of people with medium-sized pension pots as life expectancy increases and more people build up defined contributions pension pots. People need a wider choice of retirement income to fit their circumstances and encourage them to save for retirement.
"We will continue to lobby the government to encourage much needed innovation in this increasingly important market."
That's not all! For the rest of our Budget 2008 coverage, click here
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.