Standard Life is claiming that in response to the budget changes to pensions, a clearer and simpler approach to the death benefit tax charge is needed.
The Government acknowledged in its consultation paper that the 55% tax charge could be too high in a majority of cases. This new death benefit tax charge only applies in two circumstances where a lump sum is paid out (most commonly with a SIPP).
Situation number one occurs when a person dies age 75 or older, applying to the entire fund regardless of whether the customer had taken any withdrawals from their pensions or not.
Situation number two occurs if a person dies before the age of 75 and had started to take withdrawals. The rule applies to the part of the pension that has been “touched” also referred to as “the crystallised fund”.
Human resource expert and Standard Life head of customer affairs, Julie Hutchison, said that she believes a simpler and fairer way of doing things is to align the death benefit tax charge for crystallised funds to the IHT regime. This particular solution makes sense for a few different reasons. It is fairer because the tax charge gets reduced to either 40% or 0% in line with IHT. Whether or not tax is due depends on the identity of the recipient and wealth of the person. Any money that would get passed to a spouse, civil partner or charity would be exempt from tax.
Experts express that a charge of 55% risks driving the wrong customer outcome and acts as more of a penalty for people that choose to “do the right thing”. An IHT alignment would mean removing this stigma from those that choose to create a sensible income from their pension. Additionally, the age of 75 shouldn’t be used as a trigger point for tax. This would be removed in the proposed solution for the new regime.