The Government is threatening to remove the ability to inherit an untouched pension pot tax free into a drawdown account if the deceased is under 75.

The unexpected change was proposed in documents released by the Treasury about pension tax changes on Wednesday.

The proposed change was hidden in the small print of the bundle of complex tax consultations.

It was spotted by former Pensions Minister and LCP pensions consultant Steve Webb.

The consultation was mainly focused on the legal changes necessary to implement the abolition of the Lifetime Allowance.

If implemented, the changes would take effect from April 2024.

The statement said: “Individuals will still be able to receive the benefits .. but the values will no longer be excluded from marginal rate income tax under [the Income Tax (Earnings and Pensions) Act 2003], with effect from 6 April 2024.”

It has been possible to inherit a pension pot free of income tax where the person who died was under the age of 75 following changes made by George Osborne in his time as Chancellor in 2015.

Steve Webb said “For the last 8 years, people have known that if a loved one died under the age of 75 they could inherit an untouched pension pot free of all tax. The money could sit in a drawdown account, being invested and growing, and would be a source of tax free income whenever needed. 

“This tax advantage risks being abolished by next April if these new proposals are implemented. It would be totally unacceptable to make such a big change ‘through the back door’. If ministers plan to remove this pension tax break they should announce their plans publicly and have them properly debated.”

• The full policy paper from The Treasury can be read online at https://www.gov.uk/government/publications/abolishing-the-pensions-lifetime-allowance/abolition-of-the-lifetime-allowance