You know what’s not a good time? Losing a loved one unexpectedly. And you know what makes that worse? The government swooping in to grab a chunk of the financial lifeline meant to support their grieving family. Yes, folks, just when you thought tax raids couldn't get any sneakier, the latest budget changes have added a new twist: inheritance tax (IHT) on death in service benefits. It’s almost as if the Treasury sat down and said, "How can we make this whole grieving process just a bit more unbearable?"
Death in Service: A Safety Net, Until Now
Traditionally, death in service benefits are designed to soften the blow of a sudden loss, providing a tax-free lump sum to a beneficiary of your choice if you die while still employed. The idea? Help cover costs like housing, child care, education, and, you know, keeping the family afloat during a devastating time. But now, the chancellor has decided that maybe — just maybe — your grieving children haven’t suffered enough. Why not throw in a bit of tax bureaucracy to really make things memorable?
As part of a sweeping set of proposed changes, death in service payments under defined benefit pension schemes could soon be treated as part of your taxable estate. Spouses and civil partners are still in the clear (for now), but anyone else — including your children or an unmarried partner — may face a hefty 40% IHT bill on those payments. Yes, that’s right. The very payment designed to provide a lifeline could become the anchor that drags them under.
A Cruel Blow to Families
Take the example of a single dad with two kids. He has £500,000 in assets, including his home, and a death in service benefit worth £200,000. Currently, his children wouldn’t pay a penny in IHT. But come April 2027, under the new rules, that £200,000 will be lumped into his estate, slapping his kids with an £80,000 tax bill. What a delightful surprise during an already miserable time.
And just when you think, "Well, I’ll just move my pension to dodge this nonsense," the experts chime in: "Bad idea!" Defined benefit pensions are like gold dust, offering inflation-linked incomes for life, and often providing ongoing support for a spouse. So if you’re thinking of transferring to a defined contribution scheme to avoid the tax snatch, think again. It’s like swapping your Rolls-Royce for a rusty bicycle because you don’t like paying road tax.
Why the Confusion?
You might wonder why some pensions are exempt. Simple: it’s the difference between insurance policies held in trust (outside IHT) and lump sum payments treated as pension benefits (inside IHT). Tom McPhail from The Lang Cat consultancy suggests that it might be possible to wiggle out of this mess by restructuring death benefits with a trust-based insurance policy. But let’s be real: most people barely have the energy to update their will, let alone navigate the labyrinth of trust law to sidestep the Treasury's latest money grab.
The Government’s Masterstroke
Of course, the Treasury is consulting on these changes until January 22. And we all know how that goes — a nice façade of listening before ploughing ahead regardless. If you think this consultation will lead to a change of heart, think again!
So, there you have it: a once tax-free benefit that provided essential support for grieving families is now being eyed as easy pickings by the Treasury. Peter Kelley, a vicar and trustee of a pension scheme, put it best: “Some things should just never happen in a civilised society. It must be opposed.”
But hey, why would we expect anything different? The government’s got a budget hole to fill, and what better way to do it than by making a grab for the pockets of the recently bereaved? After all, death and taxes are the only two certainties in life — and it looks like they’ve decided to combine them for maximum effect.
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