From 6 April 2024 inherited pensions may no longer be excluded from marginal rate income tax, following plans announced by the government to change income tax rules for inherited pensions and make them liable for marginal rate income tax.
It is not yet fully understood exactly how the proposed tax change will work as it was only mentioned as part of new guidance in relation to the removal of the lifetime allowance, so further detail and clarity is needed.
As part of the Spring Budget 2023, the lifetime allowance cap was abolished which removed tax liability on larger pension pots exceeding £1.07m. During the latest announcements it was stated that the government now intends to charge tax on pension benefits at marginal rates of tax.
It is believed that the measure is being introduced as a way to offset the loss of tax from the removal of the lifetime allowance. However, as far as we are currently aware, all pension beneficiaries would be included.
Who will be impacted?
Under the current regime, if someone dies before age 75, their pension can be inherited completely tax-free if taken as income
However, the government is considering new rules, where someone dies before age 75 and they choose to access as yet untouched inherited pension as income, the entire amount would be subject to income tax.
By contrast, if the same person took the inherited pension as a lump sum and it was within the £1,073,100 lump sum limit, it would remain tax-free
Therefore, these changes could potentially subject many more people to taxation and would affect beneficiaries of members who die before age 75 leaving unused funds in their pension pot.
Summary
The proposed changes could be huge for the way tax is treated in relation to beneficiary pensions and further clarity is certainly needed from the government before they come into force from 6 April 2024. However, it could be sensible to plan ahead where possible and think about how the changes might affect your personal circumstances.
For further information or advice on how the potential changes could impact you, get in touch with a member of our financial planning team by emailing financialplanning@pmm.co.uk or calling 01254 679131.
A comment to note that the article does not constitute personalised advice and that advice should be sought before taking any action.
