The IFS said: “For example, a cap on the amount of pension wealth that can escape inheritance tax could be aligned with a reduced cap on the amount of pension on which a 25 per cent tax-free lump sum can be taken.
“Such a cap set at £400,000 would mean that a homeowning couple could still bequeath up to £1.8mn in total free of inheritance tax, but those with more could face an additional bill.”
It also suggested a reinstated lifetime allowance should be less generous for defined benefit pensions (compared to defined contribution pensions) than the one that was in place from 2006 to 2022.
Under previous rules, the lifetime allowance valued defined benefit pensions at 20 times the pension income that they provide (plus any tax-free lump sum).
The IFS said one option could be to reintroduce the lifetime allowance as a cap on contributions to DC pensions and accrued benefits in DB pensions, rather than on the pensions’ estimated value.
Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, said: “Removing the pensions lifetime allowance was a giveaway to those with the largest pension pots; in 2021-22 only 11,000 individuals paid this charge with the average amount due being over £40,000 each. Reversing this change is right if other pension tax reliefs aren't cut back.
“Better would be to implement reforms such as reducing the maximum amount that can be taken tax-free from a pension pot and closing the loophole which allows pension pots to be passed on without payment of inheritance tax.
"These changes would weaken the case for reintroducing a lifetime allowance at the same level as it was before and could allow greater support for those with smaller pensions.”
amy.austin@ft.com
