Income Drawdown Pensions should be free of Inheritance Tax on death

A pensioner on retirement may have funds held by Trustees, such as an employers pension scheme (so the pensioner is not the legal owner, but merely a beneficiary) and/or he may hold pension funds in an income drawdown scheme (in which case he IS the legal owner and the fund value on death will form part of the estate when calculating Inheritance Tax)

In the first case, where the pension is held on trust, the pensioner may nominate the surviving spouse (if any) a former spouse or other family members for example to be given the benefit of the fund and no loss to inheritance tax ("IHT") will be suffered. But in the second case, the deceased's income drawdown fund will be part of the estate for IHT purposes and may suffer a penalty of 40%.  Even if left to the surviving spouse, in which case it could for the time being be free of IHT, the amount still remains vulnerable to IHT when the survivor dies.  This is purely arbitrary, grossly unfair, and it undermines pensioners' right to manage their own affairs and pension provision for their families through income drawdown schemes. 

On a more general point, there seems no logic or fairness behind the rule which makes a pension (regardless of the policy type or arrangement) left to a spouse exempt from IHT, but a pension left to the child or sister/brother for example, to suffer immediate 40% tax. Notice also that, having suffered a loss of 40% of the pension fund, the nominee continues to be taxable on the pension income drawn from the remainder.

I believe all funds held in approved pension schemes, including income drawdown, should be capable of being passed on to the deceased's nominee(s) without tax. I.E. All pension funds, wherever held, should be beyond the scope of IHT, rather than simply those which, as often as not by simple chance, are held in trust. 




Why does this idea matter?

The situation described is an anomaly which has no justification, serves no social purpose and can cripple the finances of the family. It serves to inhibit and punish the exercise of the right to transfer the employee's fund to an income drawdown arrangement, which potentially is one of the greatest liberating developments in the field of pensions.

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