A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-tax
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
B] The Issue
Pensions are often a gross entity which makes tax relevant for the final outcome.
Two recent tax issues illustrate this in a clear manner:
C] UK: Pensions inheritance tax raid affects 150,000 families
Labour’s pensions inheritance tax raid will hit 150,000 grieving families with higher death duty bills, figures show. Rachel Reeves’s decision to apply inheritance tax to pension wealth from April 2027 will drag 31,200 families into paying the levy for the first time by 2030, according to data obtained through a Freedom of Information request.
Some 121,500 families that already pay inheritance tax will also see their bills rise as a result of the change. The policy means that estates with relatively modest assets and pension savings are likely to face either new or higher inheritance tax liabilities.
Inheritance tax is usually paid at a rate of 40pc on an estate above the “nil-rate band”, which is currently set at £325,000. Someone with a mortgage-free property worth £300,000 – just above the national average – and a pension worth £100,000 would face an inheritance tax liability of £30,000 from 2027, according to recent analysis. This would rise by £80,000 to £110,000 if they had a pension valued at £300,000.
The figures assume the full nil-rate band is available and that the additional residence nil-rate band of £175,000 – if you pass a family home to direct descendants – does not apply. The nil-rate band or residence nil-rate band allowances are set to remain frozen at their current levels until 2030.
Currently, pensions inherited by beneficiaries of those who died aged 75 or older are subject to income tax at the beneficiary’s marginal rate. From April 2027, this will apply after inheritance tax has been deducted, as beneficiaries withdraw income or lump sums from the inherited pension. As a result of this “double hit”, some taxpayers could face marginal tax rates as high as 90pc on inherited pensions, according to RSM.
The Office for Budget Responsibility estimates that in the 2027-28 tax year alone, the average inheritance tax liability is expected to be £169,000, increasing by around £34,000 when pension assets are included in the value of the estate. However, the OBR estimates do not account for potential behavioural changes following the announcement of these measures, such as individuals drawing down pension funds more quickly or making greater use of exemptions or reliefs to reduce their estate’s overall inheritance tax liability. Inheritance tax receipts have already soared to record highs, hitting £6.3bn between April and December 2024, £600m higher than the same period in 2023.
Pensions were previously considered a tax-efficient way to pass on wealth. But experts have warned that the risk of a large tax bill on death will reduce the incentives for people to save for retirement. “The current proposals are an affront to people who have done the right thing by diligently investing through a pension throughout their working lives. They undermine the already fragile confidence in the pensions system and could drive decisions that undermine long-term financial security.”
D] Australia: Review of pension tax ruling
The SMSF Association has called on the government to urgently review Tax Ruling 2013/5A1, saying the commissioner’s view on when a pension ceases due to the failure to make minimum pension payments remains problematic. In a submission in collaboration with the joint bodies, the SMSFA said TR 2013/5 lacks clear legislative backing and its reliance on regulation 1.06(9A) appears to be an overreach, adding unnecessary complexity without providing practical benefit.
The addendum to TR2013/5 deals with when a superannuation income stream commences and ceases. “With around 35 per cent of the current SMSF population in retirement phase and a further 10 per cent transitioning to retirement, the number of taxpayers affected by this Ruling is significant,” the submission stated.
The joint bodies said that while it welcomed amendments made to incorporate legislative amendments flowing from the introduction of the transfer balance cap regime, it did not believe it should be the responsibility of taxpayers to bear the consequences of the commissioner’s delays in updating guidance to reflect new laws and practices.
“At a minimum, the commissioner needs to ensure that updates to TR 2013/5 do not apply retrospectively to disadvantage recipients of account-based income streams,” it said. “This situation is further exacerbated by the lack of consultation during the update process which saw changes to the Ruling, particularly in relation to minimum pension underpayments, bypass the consultation on draft TR 2013/5DC11.”
The submission continued that there is a particular concern with the change in the ATO’s view that where a pension fails to comply with the pension standards, an account-based income stream ceases for income tax purposes only, but not necessarily for superannuation purposes. “TR 2013/5 is a long-standing public ruling, originally published in July 2013 and applying from 1 July 2007. It has shaped industry practice over many years, especially in relation to treating a superannuation income stream as having commenced or ceased for both superannuation and tax purposes,” it said.
“This practice has gone unchallenged by the ATO despite the commissioner being aware of the practice and begs the question why a change in the legal interpretation is necessary now.” Furthermore, the submission said the latest update may create additional administrative steps that under the previous version of the ruling were considered to have already occurred.
“These new requirements appear to add unnecessary complexity without providing any practical benefit as they lead to the exact same outcome.” “Ultimately, a new retirement phase income stream must commence and that income stream needs to meet the pension standards in the SIS Regulations to ensure that the transfer balance credit and retirement phase recipient rules operate as intended.
“While the focus of our feedback is on the latest update to TR 2013/5, we believe it is very important to address a broader issue stemming from the original ruling.” The SMSFA said that in its view, a pension is a contractual obligation between a trustee and a member. If minimum payments are missed, the pension does not cease – rather, the trustee is in breach of its contractual obligation, with any unpaid amounts remaining a debt owed to the member.
“This interpretation aligns with contract law, and if this fundamental issue were addressed, many of the concerns in this submission would be resolved. Therefore, we urge the ATO to reconsider its stance on this matter.”