IFS: ‘Pensions should be liable for inheritance tax’

The Government should end "the ludicrously generous tax treatment of inherited pension pots", according to the Institute for Fiscal Studies (IFS).

Ahead of the Spring Budget on 11 March 2020, the IFS floated this as one of several options to consider instead of tinkering with pensions tax relief.

Former chancellor Sajid Javid was reportedly considering cutting the relief for high earners prior to his resignation last month.

Currently, savers get pensions tax relief when they put money into their pension and are liable for tax when they receive income from a pension.

The relief can be reclaimed at the saver's marginal rate, with higher-rate and additional-rate taxpayers able to reclaim 40% and 45% respectively.

The IFS expects cutting this relief for higher earners to save the Treasury more than £11 billion.

That would raise income tax bills for those with annual incomes of more than £50,000 - the group for which Prime Minister Boris Johnson pledged income tax cuts during his successful election campaign.

Better options to revamp pensions tax, according to the IFS, would be to reduce the tax-free lump sum, which is currently set at 25%.

Alternatively, the Treasury could impose national insurance contributions on employer contributions into a pension.

Another possibility might be to end the tax exemption of inherited pensions, which don't currently count as part of an estate and are excluded from inheritance tax.

We will provide coverage of Spring Budget 2020.