To ask His Majesty’s Government what assessment they have made of the impact on bereaved families, confidence in pensions and future levels of pensioner poverty of proposals to impose inheritance tax retrospectively on unused pensions and death benefits.
My Lords, the Government continue to incentivise pension savings for their intended purpose of funding retirement. Most unused pension funds and death benefits payable from a pension will form part of a person’s estate for inheritance tax purposes from 6 April 2027. This removes distortions resulting from changes made over the last decade, which have led to pensions being openly used and marketed as a tax planning vehicle to transfer wealth, rather than to fund retirement.
I thank the Minister for his Answer, but my Question was whether the Government have actually properly considered the real-world impact of these unworkable proposals. With its aim to hit the minority of wealthy pension owners, this policy could actually damage millions of less well-off families who will see a 40% cut in death benefits, especially if they are in a defined contribution scheme, much less so in defined benefit. A single parent with a house and children will lose out significantly. Does the noble Lord recognise that this retrospective confiscation without transitional protection undermines confidence in long-term planning, reduces long-term investment and will lead to more people rushing to take money out of their pensions quickly, just in case they may face the inheritance tax? This is especially the case if they can take out thousands of pounds a year at just 20%, which will mean more pensioners in future in poverty, despite the Government’s aim to get more people saving for a good pension.
I am grateful to the noble Baroness for her question; I think the short answer is no. Let us be very clear: this is not a retrospective policy change. It takes effect for deaths on or after 6 April 2027, so that is in no way retrospective. As for the examples that the noble Baroness gives, it is important to be very clear that estates will continue to benefit from all the normal nil-rate bands, reliefs and exemptions available. An estate can pass on up to £1 million with no inheritance tax, and spouses are fully exempt from inheritance tax. More than 90% of UK estates will continue to have no inheritance tax liability following these changes.
May I welcome my noble friend’s clear statement that the purpose of a pension fund is to provide pensions and not to assist the better-off in estate planning? Does he agree with me, given the frequent press comment that inheritance tax is, in many senses, a voluntary tax, that anyone will be able to avoid paying the higher rate of tax with a modicum of planning?
I very much agree with the first part of my noble friend’s question. It is very important to state that the intended purpose of pension savings is to fund retirement. The Government continue to incentivise pension savings, with tax relief on both contributions to pensions and the growth of funds held within a pension scheme. These tax incentives are very significant, costing taxpayers £78 billion a year. It is therefore right, as my noble friend said, that it is important to ensure that these tax reliefs are being used for encouraging savings for retirement, rather than ordinary taxpayers subsidising the wealthy to pass on their wealth free of inheritance tax.
My Lords, does the Minister agree that it is an important principle of the tax system that tax reliefs, and therefore tax expenditures, should be tightly drawn? Does he also agree that the point of pension relief is to provide a pension in retirement, and therefore that pension savers should draw down their pension, rather than using it as a device to avoid inheritance tax and to improve the lot of their descendants, rather than themselves?
I do agree with everything the noble Lord said. I enjoyed discussing these matters with him when he was a Treasury official and I was a special adviser. I probably learned a lot of this from him then, so I completely agree with what he said. To repeat, the purpose of pension savings is to fund retirement. If taxpayers are spending £78 billion a year on that, it is very important that it is used for its intended purposes rather than for estate planning, as the noble Lord says.
My Lords, does the Minister agree that in real life, many people restricted their lifestyles, spending and gifting in order to build a sufficient defined contribution pension that could pay, if needed, for years in a care home—not knowing how long they would live or their health condition—and because they did not want to burden the state or their children? They now see that they were being gullible in believing the assurances that anything unused could go to their loved ones free of inheritance tax, and that the Government simply regard their sense of responsibility as rather stupid. What would the Minister say to those people?
More importantly, what would I say to the noble Baroness? I would say that she is saying things that are completely misleading. As I have said already, estates will continue to benefit from all the normal nil-rate bands, reliefs and exemptions available, so an estate can pass on up to £1 million with no inheritance tax, and spouses are fully exempt from inheritance tax. It is also important to say that we have equal treatment here. There is equal treatment for inheritance tax purposes between pension and non-pension assets, and I think that is perfectly fair within the system.
My Lords, I speak as someone whose relatives have struggled for years, rather than months, in coping with the probate system, partly because of the problems caused by the inefficiencies of the probate office. Executors will not be able to deal with the extra complexity of adding pensions to IHT, particularly those with lots of small pension pots. My noble friend Lady Altmann, in her submission to our Finance Bill Sub-Committee, has suggested a simpler mechanism for dealing with this and raising the necessary revenue. Will the Government examine this sympathetically?
I presume the noble Baroness is referring to the proposal of the noble Baroness, Lady Altmann, for a flat tax, and it is very interesting that she raises that. Currently, fewer than 10% of estates will have an inheritance tax liability. If you put a flat tax on all pensions, you are asking 90% of estates to pay more so that 10% of estates can pay less. I do not consider that to be fair.
My Lords, interest charges for late payments of tax are charged at 8% per annum and apply to estates after six months. Does the Minister agree that, given potential complications in finalising and executing wills, six months is rather short and that a longer grace period of at least one year should apply before interest charges are levied?
My Lords, the Minister may recall that this time last year I asked a Question about pensioners who are coming up to the time when their pensions are ready to be drawn down, and they are looking forward to the 25% tax-free lump sum. Despite the noble Lord’s reassurances, thousands of pensioners took their pension early. Can the Minister reassure pensioners waiting to draw down their pension that there will be no changes to the 25% tax-free lump sum?