Should Inheritance Tax And Income Tax Be Paid On Pensions On Death?

When someone dies, pension pots should be included in the value of their estate for the purposes of inheritance tax, according to a recent report from the Institute for Fiscal Studies ...

The tax system currently treats funds that remain in a pension at death extremely favourably, with income tax relief given when the money is paid into the pension, no income tax when the money is taken out, and no inheritance tax when funds remain in a pension at death.

In their report called 'Death and Taxes and Pensions', The IFS believes that subjecting pensions to inheritance tax would raise 'substantial' revenue for the Government over time and remove the 'perverse incentive' to avoid using a pension to fund retirement.

It also suggested that 80% of the funds held in pension pots should be counted for inheritance tax purposes if the funds are to be subsequently subject to income tax!

There are many attractions to saving into a pension, though it should be about helping an individual to enjoy a comfortable retirement rather than as a tax-efficient way of passing money from one generation to another.

I do caution that changing the rules may have some unintended consequences, specifically by pushing people to take their tax-free lump sum earlier than they would normally do which would reduce the overall amount they have available for retirement.

Potential reforms to the treatment of pensions at death could definitely incentivise people to use their pensions to provide a secure lifetime income.

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