Beneficiaries who inherit death benefits from alternatively secured pensions could have to pay 55 per cent tax from their own pocket, warns Skandia.
This charge comes on top of 40 per cent inheritance tax already taken out of the deceased’s pension fund.
Head of marketing and pensions Billy Mackay says the industry has largely overlooked the fact that beneficiaries may have to use their own money to pay potential tax charges overall of 82 per cent on death benefits announced in the pre-Budget report, as they may be too young to access the pension fund.
A 40 per cent unauthorised payment charge has to be paid by the person inheriting the fund. This cannot be taken from the transfer lump-sum death benefit, meaning the recipient will need to find another source of cash to pay it.
There is also an unauthorised payment surcharge of up to 15 per cent for most cases if the amount passed on exceeds 25 per cent of the total unauthorised payments made in that tax year. Again, this will have to be paid by the person who inherits the fund.
A third scheme sanction charge of between 15 to 40 per cent of the unauthorised payment will be paid by the scheme administrator and cannot be deducted from the client’s pension fund.
HM Revenue & Customs says it is still consulting on whether it will allow these three charges to come out of the pension fund, as with IHT.
Mackay says: “In the era of simplification, the proposed level of complexity in this tax framework is baffling. Under the new rules, beneficiaries could suddenly be faced with a bill they cannot afford.”