Pension pots should be included in the property’s value on death for inheritance tax purposes, according to the Institute for Fiscal’s latest report on ‘Death, Tax and Pensions’ Studies.

Basic income tax can be levied on any money left in the pension upon death, the research organization added.

‘The tax system manages the amount left in the pension on death,’ says the IFS.

According to the IFS, adding pensions to inheritance tax could increase Government revenue over time and remove the ‘perverse incentive’ to avoid using pensions to fund retirement. -milk.

Forecasts: The IFS believes that the government could get a lot of revenue by taxing pensioners in other ways.

Currently, if someone dies before the age of 75, the amount left in their pension is exempt from income tax.

Tax relief is provided when the money is paid into the pension, and there is no income tax when the money is withdrawn.

Furthermore, any money left in the pension upon death, regardless of age, is usually exempt from inheritance tax.

According to the IFS: ‘This creates an odd situation where the tax system treats pensions more like an inheritance vehicle than a pension train.

‘Therefore, there is a huge incentive, for those who can, to use their non-pensioner assets to fund their retirement and save their pension for inheritance.’

The IFS says private pensions are “the most effective means of leaving money for children and other heirs”.

There is a huge incentive, for those who can use non-pension assets to fund their retirement and save the pension for inheritance.

The report provides an example of a couple being able to pass on an inheritance of more than $3 million tax-free through the current system.

The IFS added: ‘If money held in a pension pot is subject to income tax – reducing its effective value – it would be appropriate for 80 per cent of these funds to count towards ‘the inheritance tax.’

On the potential benefits of paying people’s pensions with inheritance tax, the IFS said: ‘Income will be limited in the short term as few of the deceased now offer pension pot.

‘But if the generation benefiting from pension freedom – those who retired after April 2015 – died with a full pension pot, we estimate it would raise $1.9 billion a year ( in today’s terms) of additional inheritance income. .

‘This increase will be significant, representing an increase of around a quarter in the scope and effect of inheritance tax.’

Pots: Average defined contribution pension pots, by age group, according to the IFS

Pots: Average defined contribution pension pots, by age group, according to the IFS

He added: ‘The results are very sensitive to the extent of the reduction in pensions before death: if half of the current pension is negligible at death, output will fall to £0.9 billion.’

The IFS said its proposed reforms would provide a ‘more consistent’ tax treatment for money that remains in a person’s pension when they die.

The IFS also said that its proposed reforms should be implemented as ‘quickly as possible’ to reduce the extent to which individuals are saving for retirement in the false expectation that they will they can now inherit these funds. .

The reforms proposed by the IFS will increase inheritance tax and income tax.

Variations: The portion of the property at the time of the death of the tax, according to the IFS

Variations: The portion of the property at the time of the death of the tax, according to the IFS

Projections: Proportion of men and women who die before age 75, by age and sex

Projections: Proportion of men and women who die before age 75, by age and sex

The IFS said: ‘Governments that do not want to increase the overall tax burden can use the revenue to raise thresholds and/or cut tax rates. Taken together, this will improve the efficiency of the economy and the integrity of the tax system.’

The report said the extra income raised could be put into public services, such as social care for older people and the NHS.

What do IFS-recommended innovation experts do?

Speaking to This is Money, Steve Webb, partner at consultancy LCP said: ‘There are many attractions to saving for retirement, but it should help you enjoy a comfortable retirement but not as a method of payment of taxes. money for your heirs.

It is difficult to imagine why the heirs should avoid tax on the pension they inherited when someone dies at age 74 but pay it if someone dies a year later.

‘Similarly, a family home worth half a million pounds will count as an asset for inheritance tax purposes but a pension pot worth half a million pounds will not.

‘The IFS is right to point out the shortcomings that can be rectified and the funds that could be used to improve pensions for the general pensioner population.’

When do you have to pay inheritance tax?

Inheritance tax is payable on assets in excess of £325,000, or £500,000 if assets are passed on to direct descendants and the value of the assets is less than £2million.

On properties worth more than £2million, housing rates begin to fall.

If the spouse or partner predeceases, the spouse’s benefits can be transferred to the surviving spouse according to the will, and this means that these thresholds can be doubled.

But Jon Greer, head of pensions policy at Quilter, said: ‘Stopping the tax treatment of pension pots on death for “justice” makes the situation “fair” for the money, but not necessarily the family – especially those who may lose. a loved one at a relatively young age that can have a significant financial impact.

‘Changing the rules could also have unintended consequences, such as forcing people to take their money tax-free earlier than they normally would which could reduce their total retirement savings. .

‘In the grand scheme of things, the money lost for money from this policy may not be significant compared to other areas of public spending, but it may have a positive impact. of a material family that does not have a high or corresponding salary. some of the extreme examples highlighted.’

He added: ‘I know that losing a loved one is a difficult and emotional time and worrying about the financial impact of such a loss can add to the stress. The tax-free nature of the old age death pension pot can provide much-needed financial relief to these families.

‘Given that the IHT threshold was recently frozen for a further two years in the autumn announcement which gives the Government an extra £1 billion for property, more and more people who will pay inheritance tax. These further changes to pensions will lead to more people paying into what is often described as a tax-averse nation.’

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, believes pension reform could encourage people to use their pensions to secure a lifetime income. milk after death.

But he said: ‘We also need to consider whether these proposed changes become an obstacle for people trying to support their families.

‘For example, someone who dies before the age of 75 can still have a young family to support and their pension can be treated as life insurance rather than as a bus.’

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