The new assisted dying bill could pressure elderly people into dying earlier in order to avoid passing on large tax bills to their families, experts have warned.
Under current rules, if someone dies before age 75, most defined-contribution (DC) pension benefits can be paid tax-free. But after this point, beneficiaries are liable for income tax on the payments – and they could also face a hefty inheritance tax charge.
This could potentially raise bills by huge numbers for many people and add an extra complication to an already difficult decision for those within months of their 75th birthday who are considering assisted dying.
Former pensions minister Ros Altmann said: “I am concerned that we must not let this bill accelerate people wanting to end their lives to help the next generation.”
Experts warn they may wish to speed up the process to avoid their family having to pay large sums of tax on their inheritance.
Jon Greer, head of retirement policy at Quilter, said: “If the bill were to be legalised, it could have some potentially significant implications for pensions and estate planning. For individuals who are terminally ill and approaching the age threshold of 75, this might factor into their decision-making, whether consciously or not.”
It comes as the draft law that would legalise assisted dying in some circumstances in England and Wales cleared all of its initial stages in the House of Commons.
If the bill becomes law, people will need to have a terminal diagnosis of six months of life expectancy to qualify, and even if people are successful at applying for assisted death, they may not get to use it, either through choice or an earlier death.
Impact on pensions and income tax and inheritance tax
If the assisted dying bill goes through, more people could make decisions about their pension based on how much income tax their family may have to pay if their pot is passed on.
Mr Greer said: “A morbid but relevant point is the tax treatment of pensions. For individuals who are terminally ill and approaching the age threshold of 75, this might factor into their decision-making, whether consciously or not.”
They may, for example, choose to spend or give away their property and possessions before death to avoid high taxation.
It’s not just income tax that will have to be considered but also inheritance tax (IHT). This is because, as of April 2027, many pensions will also be swept into the IHT net, following changes in the autumn Budget.
IHT is usually charged at a rate of 40 per cent on an estate worth more than £325,000 but this increases to £500,000 if it includes a home being given to children or grandchildren. Married couples can pool their allowances, so this becomes £1m.
Although this applies no matter your age, the assisted dying bill could lead to terminally ill people considering the implications of the addition of IHT on top of income tax if they are 75 or over.
For example, if someone died before the age of 75 now, leaving behind a £400,000 pension with the beneficiary taking it as a lump sum, they would have to pay 40 per cent inheritance tax – a bill of £160,000.
They would not have to pay any income tax as the death occurred before the age of 75 and ultimately would keep £240,000.
Should they die after the age of 75, after April 2027, they would pay £160,000 in inheritance tax and 45 per cent additional rate income tax of £108,000.
This would leave them with £132,000 at an effective tax rate of 67 per cent.
In this scenario, someone who is terminally ill may take into consideration the amount their families would lose from their inheritance should, firstly, they die after the age of 75 and, secondly, post April 2027.
If a beneficiary was taking the money incrementally, rather than a lump sum, then they would pay income tax on the withdrawals but it would be at their marginal rate of tax whatever that would be in addition to any other income.
Andrew Tully, technical services director at Nucleus Financial, said it creates a “cliff-edge situation” and a few days either way of a 75th birthday could have a significant financial impact.
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He said: “People are at the end of their life, but at the same time are worried about providing for those they’ll leave behind.”
Rachel Vahey, head of public policy at AJ Bell, added: “At the moment whether you die before or after age 75 can have a huge impact on the tax your loved ones pay on any inherited pension funds.
“Even dying on your 75th birthday could mean they face a much bigger tax bill. But trying to choose exactly when you die is largely impossible.
“The reasons people may choose to take this route will be wide-ranging and extremely personal to them, but pension taxation is unlikely to be high on the list of reasons why.”
However, the average UK pension pot is £20,077, according to PensionBee data, suggesting many families will not have to pay large income or inheritance tax.
Mr Greer added that there is also an important IHT rule that prevents someone from benefiting from a will if they are found to have assisted in another person’s death.
He said: “While this is clearly designed to prevent abuse, one would assume such a rule would have to be very carefully re-examined under a legalised assisted dying framework to avoid unintended consequences for families and caregivers who are acting in line with the law.”
He added there will be safeguards in place intended to minimise the risk of a person being coerced or pressured by any other person into requesting or proceeding with an assisted death.
Gary Smith, partner in financial planning at Evelyn Partners, said that HMRC might take a “wait and see” approach, assessing the number of people who opt for assisted dying, especially close to age 75, and the potential loss of tax revenue before deciding whether or not legislation changes are required.
How changes could impact financial decision making
Ros Altmann said she is worried someone approaching that age threshold might factor this into their decision-making.
Speaking to The i Paper, she said: “There is always a possibility of someone terminally ill deciding they do not wish to go on, with or without the new legislation. I just hope they would not do so for tax reasons.
“Such self-sacrifice is heartbreaking and as many safeguards as possible need to be in place.”
However, there are still many unanswered questions on how the proposed bill would work.
Mr Tully said: “There’s not much planning you can really do at the moment, other than setting out who you want to receive benefits, but this could now become yet another consideration.”
The Treasury has been contacted for comment.
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