Early pension access could lead to 55% death tax

Allowing early access to pension funds in some cases could place pensioners’ beneficiaries at risk of a 55% tax charge, AJ Bell warns.

The Treasury's consultation on early access closed on 24 February.

However, according to Treasury correspondence with AJ Bell, two of the four early access models proposed in the paper would lead to punitive tax charges on the remaining fund if the pensioner dies.

Under the current tax regime, accessing the 25% tax-free lump sum before age 55 or permanently withdrawing funds in the case of an emergency would be classed as benefit crystalisation events (BCEs).

BCEs make the remaining funds in a pension liable to a 55% tax charge on lump sum death benefits.

"Any solution that is structured to help in cases of immediate financial hardship, but then applies a 55% tax to the residual fund on the death of the pension investor must be flawed," says Billy Mackay, marketing director at AJ Bell.

"I would question whether there is genuine appetite from consumers for these options as they stand.

"If the government is going to offer this option, the rules need to be established so that lump sum death benefits paid from the remaining fund are not subject to the 55% tax penalty, at least until the pension scheme member has reached their normal minimum pension age."