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Access to pension freedoms in ill health could lead to inheritance tax trap

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Under current rules, those suffering from ill health could potentially see their pension assets ultimately subject to inheritance tax (IHT) if they transfer to a new pension scheme to access the range of flexibilities introduced by the pension freedom reforms in April 2015.

In most circumstances, inheritance tax no longer applies to death benefits paid by registered pension schemes whether paid as lump sums or income. Following the extensive changes to pension legislation this year, assets can pass on within the pension wrapper and be subject to tax at the beneficiaries’ marginal rate (or with nil income tax if the member dies under age 75).
 
However, if a member transfers their pension rights from one registered pension scheme to another, perhaps because another scheme offers greater flexibility, then HMRC would deem that they made a fresh disposition of their death benefits. This is a transfer of value for IHT purposes, and could create a potential IHT liability on death if the member’s life expectancy was impaired when they made the transfer and they died within the following two years.
 
HMRC would investigate whether the member was in good health when the transfer was made if the member subsequently died within the following two years. If HMRC found that the member’s life expectancy was impaired (and the member knew it) some, or all, of the transfer value could be included in the member’s estate.
 
Jon Greer (pictured), pensions expert at Old Mutual Wealth, says: “There may be many reasons why individuals wish to transfer pension funds when they know their life expectancy is impaired. For example, if their existing scheme does not offer the full range of flexibilities that enable individuals greater freedom to pass on their pension funds.
 
“We believe this tax treatment creates an unnecessary restriction for those with impaired life expectancy and risks punishing their families by subjecting pension assets to unnecessary IHT. This is not in the spirit of the pension freedom reforms and our response to HMT’s pension transfer consultation includes a recommendation that this should be reformed.”
e to do here at the Company, I also want to be able to try my hand at some other endeavours. I plan to stay in the area and will continue to be involved in the Bank as a member of the Advisory Board following my retirement at year end, while also focusing more on my charitable and community work.”

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