Pensioners would be left short changed by the removal of Inheritance Tax exemption - Ros Altmann

The new system will incentivise everyone who has a moderate sized DC pension fund and not on high incomes in later life, either earning around average salary in their late 50s and 60s or having retired early, to take as much money as they can, as soon as they can, at the 20 per cent tax rate.

If their income is, say, £20,000 or £30,000 a year, they can withdraw their tax free cash and then also £20,000-£30,000 a year more, paying only a 20 per cent penalty. This will mean someone in their late 50s or early 60s, with a £400,000 pension fund, would have nothing left in it by the time they reach their mid-70s.

These people are unlikely to have money left in their pension funds by the time they reach their 80s and 90s, so the pension assets they built up, with the help of tax relief, will have become a spending pot for their early or pre-retirement years, leaving nothing when they need extra help if they live to a ripe old age. Most people underestimate their life expectancy, so will be worried about keeping money in their fund and potentially losing the majority of it in tax.

It will also mean that someone in their late 50s or 60s, will be less likely to want to invest in long-term, illiquid, higher expected return assets. These are the types of assets that can best boost growth and which the Government wants DC pension funds to increase their exposure to.

Independent financial advisers (IFAs) deal with higher income pensioners, but this is the minority. I am worried about those below that level. The pensions industry has not seemingly recognised the dangers of this policy. Financial advisers or wealth managers may not be so concerned, as most of their clients will have incomes approaching or well over the £50,000 basic rate tax threshold, so they would not be as incentivised to take money beyond their tax free cash, although even for these individuals, paying 40 per cent tax on the pension fund will be much less than the ultimate tax losses if they die beyond age 75.

Imposing IHT on death-in-service benefits is also a real problem. Firstly because of the fact that this retrospective taxation means people who had thought they had made careful plans in case they pass away, have had a retrospective tax imposed on them, without warning.

Secondly, because of the delays and complexity of the calculations required, loved ones will face significant delays in receiving the money.

Children who may not be totally dependent but need extra help due to their bereavement will lose out financially and be left without the money they might need, at the very time they are grieving the lost loved one.

My alternative proposal is to levy a flat-rate 20 per cent inheritance tax on all unused pension funds on death, regardless of age of death. The remaining fund can pass as a pension to the next generation or other loved ones and will only be taxable on withdrawal but can remain invested tax-free until that time. This could start pension funds passing down generations too, as we know that most younger people have much less pension wealth than ideal.

Baroness Ros Altmann is a British life peer and former pensions minister.