April 2008

Revenue closes loop-hole

Dear Editor,

The Budget has confirmed that the Revenue has closed a loophole which allowed pension funds to be passed on tax-free at death. Providers of small self-administered pension schemes (SSAS) had been marketing scheme pensions as a way of passing pension money onto family without tax since A-Day. However, the Government has clamped down on what it regards as an abuse of the rules. The change will apply to members who die on or after 6 April 2008.

The rules will treat any increase in the pension rights of one member following the death of another member - if the two members were connected - as an unauthorised payment. This means that there will be a tax charge of 70%, the same as applies to funds passed on via alternatively secured pension (ASP). The funds passed on will also be liable to inheritance tax bringing the potential tax charge to 82%.

The charge will not apply if the scheme has 20 or more members and the funds arising following the member's death are evenly distributed among all members of the scheme. This means that these rules will not impact on most final salary schemes.

This can be viewed as a logical move creating a level playing field between scheme pension inheritances and ASP. However the tax rate of 82% applied to inheritances under both seems unnecessarily punitive, and will not do anything to encourage more pension saving.

A much simpler solution would have seen the Government levy a flat rate tax charge of, say, 40% on pension funds passed onto children. In one fell swoop the Government would have raised a lot more revenue and, by having a single rate of tax, there would have been a simple understandable system all without the anguish inflicted upon people who simply want to pass some of their hard earned savings onto their kids.

Andrew Tully is senior pensions policy manager at Standard Life.

Andrew Tully
Senior Pensions Policy Manager
Standard Life