Surprise inheritance tax charge on pension funds

People using the new pensions flexibilities may find that their savings are hit by inheritance tax (IHT), in spite of Government statements to the contrary. 

Last September, HM Treasury announced that defined contribution (DC) pension scheme members dying before age 75 would be able to leave any remaining drawdown funds to their survivors “completely free of tax”. Even after reaching age 75, there would be no IHT on these funds. 

Not surprisingly – given the extensive media coverage and advice which has followed – many people are now making retirement decisions in the belief that there will be no IHT on any remaining drawdown funds when they die. 

However, unless the existing legislation is amended, these drawdown funds will fall into the member’s estate on death – and so are indeed subject to IHT. 

Richard Kandler, Linklaters pensions counsel, said: 

“This inheritance tax charge directly contradicts stated Government policy. If enforced, it would have two very surprising consequences: a harsher tax regime for drawdown funds than for other DC savings, and double taxation of drawdown funds where a member dies after reaching age 75. 

“With another Finance Bill on the way, now is the time to correct what is almost certainly a legislative error. With so many people already relying on the September announcement, the Government needs to fix this as soon as possible.”