In general, we are supportive of the government’s aim to ensure that pensions are used for the primary purpose of providing an income for the member, and while individuals may have other assets to use in their retirement/later life we do not believe that pensions should be used as a medium for wealth transfer.
However, we have some concerns about the application of the policy.
Defined Benefit Schemes – Exemption
- Lump Sums on Death: These are typically paid out as per the scheme’s rules, not as wealth transfers. For example, a lump sum guarantee is paid if a member dies within a certain period after retirement. The unpaid balance is given as a lump sum to beneficiaries, considering the deceased’s wishes and circumstances.
- Death in Service Policies – exemption
- Lump Sums: These are paid to younger, working-age individuals’ next of kin in the event of early death. These are meant to help families cope with the loss of income, not as wealth management tools. The imposition of IHT on these sums is seen as unfair to working-age families.
- Spouse/Civil Partner Definition
- Differential Treatment: We are concerned about the different treatment of spouses/civil partners compared to “common law” partners. Trustees have been able to award lump sum benefits without IHT, but changes in IHT rules now introduce spousal exemptions. This could unintentionally disadvantage individuals in non-formal unions.
We believe there is a good case for maintaining IHT exemptions for lump sums from defined benefit schemes and death in service policies. In addition, there needs to be clarification on the scope of group life policy exemptions and reconsidering the interaction of various taxes on pension death benefits.
The process proposed in the consultation introduces a great deal of complexity into the death benefit process and will lead to delays and issues. These need to be considered more fully before the policy will work as intended.
