Government plans to eliminate pensions tax loophole

In the past eight years, individuals have enjoyed the benefit of inheriting an untaxed pension pot if their loved ones passed away before the age of 75. This meant that the money could be invested, grow over time, and be a source of tax-free income whenever necessary.

However, any plans to remove this advantageous pension tax exemption should be publicly announced and debated, rather than implemented covertly. Making such a significant change without transparency would be deemed completely unacceptable.

Earlier this year, Chancellor Jeremy Hunt eliminated the previous cap of £1.073m on tax-free pension savings, known as the pensions lifetime allowance. Consequently, families have increasingly relied on pensions for estate planning due to their exemption from inheritance tax, which is typically calculated at 40%.

Yet, experts have warned that the perceived generosity of this tax break may make pensions vulnerable to reform. Labour, for instance, has stated its intention to reintroduce the lifetime allowance on pensions if elected, as it views the abolition as a tax benefit mainly benefiting millionaires. The party has indicated an exception for senior NHS doctors who had expressed concerns about retiring early to avoid exceeding the cap.

Responding to criticism, a spokesperson from HM Treasury has emphasized the government’s goal of retaining experienced professionals in the workforce to stimulate economic growth and address backlogs, particularly among senior NHS doctors. These doctors had claimed that pensions tax was discouraging them from continuing to work. The abolition of the lifetime allowance aims to address this issue. Furthermore, the spokesperson expressed willingness to collaborate with stakeholders in crafting legislation that will ensure the pension tax cut delivers positive outcomes for savers and the economy.