The proposed changes could have implications for you if you inherit a pension prior to 6 April 2024, or if you have already inherited a pension which still contains funds. Here's what you need to know.
The rules currently in place generally prevent a tax charge arising on the withdrawal of funds from a pension where the member has died before they reached 75. The government has recently released a policy paper stating their intention to alter these rules with effect from 6 April 2024.
Current rules
If you inherit a pension from a person who died before reaching the age of 75, in the vast majority cases the funds can be withdrawn as a lump sum without any tax.
The position changes if you inherit a pension from a person who died after reaching the age of 75, in which case you would normally be subject to Income Tax at your marginal rate (20%/40%/45% depending on your total taxable income) on withdrawals from the fund.
Proposed changes from 6 April 2024
The policy paper states that where a pension is inherited from a person who dies under the age of 75, to the extent a lump sum withdrawal is made above the deceased member's lump sum tax free limit (currently £268,275), the excess will be subject to Income Tax at your marginal rate. This could clearly lead to a much greater tax liability if you inherit a pension from somebody aged under 75, after 6 April 2024.
The changes would bring the rules broadly in line for the current rules for those who inherit pensions from a member who was aged over 75 at the time of their death, but it appears they would allow for the use of the deceased person's unused lump sum allowance of up to £268,275.
The policy paper is an overview of the objectives and so is not draft legislation (which is not yet available) and so it remains to be seen how the rules will be implemented and whether any transitional/grandfathering rules are put into place, for instance to exclude pensions inherited prior to 6 April 2024 from the new tax charge. It would appear particularly unfortunate timing for those who inherit pensions very shortly prior to 6 April 2024 but do not have time to withdraw the funds prior to the implementation of the new rules.
What should you do?
In view of the proposed changes, now is a good time to start considering the potential implications for any pensions you have inherited and whether you should look to take action prior to 6 April 2024, when the new rules are proposed to be implemented. Time may be of the essence in order to optimise your position.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
