Planning Ahead: Government Proposes Scrapping Income Tax Benefits for Inherited Pensions

In a recent development that could have significant implications for thousands of UK households, the government has unveiled plans to eliminate income tax benefits for inherited pensions. The proposed reforms, set to take effect from April 2024, would mark the end of tax-free withdrawals for beneficiaries inheriting a defined contribution pension pot from someone who passed away before the age of 75. The proposal is linked to the abolition of the lifetime allowance (LTA) on tax-free pension contributions. While individuals would still be exempt from paying inheritance tax on the pension pot, they would be required to withdraw the entire sum to retain income tax benefits, rather than keeping the funds invested and making tax-free withdrawals over time. 

Under the previous system established by former chancellor George Osborne in 2015, those inheriting a pension pot from someone who died before reaching the age of 75 were entitled to receive a tax-free lump sum and tax-free withdrawals while keeping the funds invested. However, the government’s recent consultation paper indicates that from April next year, beneficiaries will be liable to pay income tax on ongoing withdrawals from inherited pension pots.  

“This is a big change, as a byproduct of the abolition of the lifetime allowance,” explained Steve Webb, a former pensions minister and partner at actuarial consultancy LCP. He expressed concerns that such a significant alteration should be publicly announced and debated thoroughly to avoid creating any unfavourable outcomes for ordinary people. 

The proposed changes are expected to impact on untouched pensions only, however, the government has not clarified how existing pension pots already in drawdown at the time of the holder’s death will be affected. This uncertainty could potentially cause difficulties for households dealing with inheritance tax, especially with the freezing of thresholds leading to more estates being subject to the regime. 

Given the potential impact of these changes on future financial plans, it is crucial for individuals to take proactive steps and plan ahead. If you have a pension, it is advisable to seek advice from financial experts. Here at Q Financial Services, we can help you understand the implications of the proposed reforms on your specific circumstances and develop a strategy to navigate these changes effectively. 

By staying informed and taking proactive measures, you can safeguard your financial future and make informed decisions to ensure your retirement and inheritance plans remain on track despite evolving government policies. 

*Information from the Financial Times:  

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