The government has ditched plans to tax inherited pensions when someone dies under the age of 75.
The Autumn Statement confirmed income withdrawals taken by beneficiaries where the member died before age 75 will not be taxed.
HMRC had previously announced in the summer that those who died with uncrystallised funds before 75 and used those to provide beneficiaries with pensions through drawdown or annuity would be taxable.
Under current rules, if you die before 75 your beneficiaries can inherit your defined contribution pension tax-free if it is under your lifetime allowance.
HMRC has now confirmed the current rules will continue and these pensions will remain tax free from April 2024.
Jon Greer, head of retirement policy at Quilter, said: “This is good news. If the government had gone ahead with the change to the tax treatment there would have been an incentive to take remaining funds as lump sums which are tax free up to the available lump sum and death benefit allowance, which will stand at £1,073,100.
“This confirmation means that there will be a similar treatment following the abolition of the lifetime allowance, albeit the amounts that can be used to provide beneficiaries’ pensions tax free appear to be unrestricted in their tax-free status. We look forward to seeing the fine detail in the Finance Bill.”
In the Autumn Statement documents, the government confirmed the lifetime allowance would be scrapped from April 6, 2024.
HMRC then published a policy paper setting out how the new regime would work.
But with just 90 working days until the new rules apply, some industry experts said this could create problems for consumers, causing confusion and pushing them to make rushed decisions.
Rachel Vahey, head of policy development at AJ Bell, said: “It was hoped scrapping the lifetime allowance may have made pensions simpler to understand, but the new rules are complicated and replace one allowance with two new ones.
“Nonetheless, today the government confirmed a start date of 6 April 2024, leaving just over 90 working days until the new rules kick in.
“Although the policy paper takes us one step closer, we won’t fully understand the new rules until we see the draft legislation which is to be published in the Autumn Finance Bill.
“Worryingly, even once Royal Assent is given, HMRC reserves the right to make changes to the rules through secondary legislation up to April 2026 rather than including them in a new Finance Bill.
“This suggests HMRC may be worried the new rules are not yet fully waterproof and leaks may emerge where it doesn’t work in the way HMRC intended.”
The policy paper said that outstanding questions regarding the lifetime allowance scrap will be answered as part of the Autumn Finance Bill.
Chris Hudson, managing director retail intermediary at Standard Life, said: “The removal of the LTA by April next year still has a number of logistical challenges that need to be worked through and people with funds above the previous LTA or protected level will be seeking to engage with their advisers or sourcing one very soon to assess the potential impact of future changes.”
