Following the changes to pension legislation in April this year, assets can be passed on within the pension wrapper and be subject to tax at the beneficiaries’ marginal rate, or be completely free of tax if the policyholder dies under the age of 75.
However, if the policyholder transfers from one registered pension scheme to another and dies within the next two years of switching provider, then the pot could be liable to IHT.
The reason for this is that HM Revenue & Customs would deem that the policyholder had made a ‘fresh disposition of their death benefits’, which is when a transfer is made for IHT purposes.
This could cause some savers to find themselves trapped in a scheme that does not offer the freedom they want, because they are concerned their pots might be hit with a hefty IHT bill if they die a year or two later down the line.
Impaired
Old Mutual pointed out that if the saver died within two years of switching scheme, then HMRC would investigate whether they were in good health when the transfer was made.
If HMRC found that the policyholder knew their life expectancy was impaired then some, or all, of the transfer value could be included in their estate.
“There may be many reasons why individuals wish to transfer pension funds when they know their life expectancy is impaired,” said Jon Greer, pensions expert at Old Mutual Wealth.
“For example, if their existing scheme does not offer the full range of flexibilities that enable individuals greater freedom to pass on their pension funds.
Unnecessary restriction
“We believe this tax treatment creates an unnecessary restriction for those with impaired life expectancy and risks punishing their families by subjecting pension assets to unnecessary IHT.
“This is not in the spirit of the pension freedom reforms and our response to HMT’s pension transfer consultation includes a recommendation that this should be reformed.”
