Actuarial consultancy Punter Southall has branded the Government's 82% tax on surplus pension funds handed to family as inheritance "disproportionate".
The rules, outlined in this week's Pre-Budget Report (PBR), will treat any increase in the pension rights of one member following the death of another member - if the two members were connected - as an unauthorised payment.
This means that there will be a tax charge of 70%, the same as applies to funds passed on via alternatively secured pension (ASP). The funds passed on will also be liable to inheritance tax (IHT), bringing the potential tax charge to 82%.
The charge will not apply if the scheme has 20 or more members and the funds arising following the member's death are evenly distributed amongst all members of the scheme. This means the rules will not impact on final salary schemes.
Helen Symonds, principal at Punter Southall, says: “Originally, Gordon Brown had stated that people did not have to buy an annuity at 75 and that any surplus in the pension fund, after the death of the member and his or her spouse, could be passed onto the pension fund of their children, minus a tax charge. This was expected to be 40% in line with IHT and the higher rate tax relief which some pension contributions have been entitled to.
“But, within six months Mr Brown had done one of his u-turns and a tax of 55% was slapped on any pension fund after the death of both parties post 75, and the balance would be subject to IHT at 40%, thereby leaving 18% to the family.
“All of us realise the tax breaks given to pension schemes. However, while most people were prepared to pay 40% on any surplus, a tax of 82% is truly disproportionate and iniquitous. Neither are we discussing the pension funds of the super rich.
“The government’s implementation of the lifetime allowance of £1,650,000 is only capable of generating a pension of around £60,000, if indexation is included. That may just about match some of the pensions paid to the civil servants who brought in this stealth tax.”
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