NEST's decision to raise its maximum contribution cap and lift transfer restrictions from next month has left members at risk of inheritance tax (IHT) charges of up to 40%, according to Salvus Master Trust.
As of April 2017, NEST - the National Employment Savings Trust - will lift its contribution cap from £4,900 to £40,000 per year and for the first time open its door to transfers. This may see NEST members hit by taxes of up to 40% in the event of death because, unlike traditional trust-based schemes, funds held under NEST form part of a person's estate, Salvus claimed.
The workplace pension provider has subsequently called for government-backed NEST ‘urgently' to review these policy changes to avoid excessive charges.
Managing director Graham Peacock said: "There wasn't necessarily a problem when there were small contributions but, with the two changes combined, NEST is becoming very aggressive in the marketplace to encourage transfers in."
The maximum contribution level, he said, had been introduced due to the ‘unprecedented' situation of the government providing capital to run NEST, while members were previously unable to transfer in or out of its schemes.
"Those restrictions were in there for a certain amount of time in case other providers came into the market - it was an anti-competitive measure and I think the EU wanted to avoid a monopoly," he said.
Peacock noted the National Audit Office had previously said the only way for NEST to be self-sustaining was if it gained £20bn of assets. It currently has £1bn of assets.
He said: "The only way for it to gain that £20bn of assets is if it becomes the provider of choice for transfers in. According to the latest figures, NEST has a £460m loan outstanding against the £660m loan facility from the DWP, with a £70m spend rate.
"So the money will run out before it gets anywhere near the self-sustaining rate. This comes at a time when, as providers, we have to prove our sustainability to the Pensions Regulator."
Peacock added: "It is completely inappropriate that members should consequently face IHT while using a DWP-backed workplace pension. It completely flies in the face of industry-wide efforts to create an auto-enrolment landscape that is simple, transparent and trustworthy.
"While it is laudable that NEST has taken steps to boost contributions and make the scheme more attractive for those with greater assets, it has opened a can of worms - and it is essential this policy oversight is corrected as soon as possible.
In response to the claims, NEST executive director of product and marketing Gavin Perera-Betts said: "We know that IHT will impact a very small proportion of our membership and applying trustee discretion to all pots can be costly. That is why, in the event of a member's death, their NEST pension pot is included in their estate for IHT purposes.
"However, NEST regularly reviews our policies and processes. With the annual contribution limit and the restrictions on transfers into NEST lifting in April, we will continue to consider our policy in relation to member deaths to ensure it continues to effectively balance the needs of our members."
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