OECD Proposes Closing Tax Advantages for Pensions Passed On as Inheritance

OECD proposal on taxing pension capital passed to heirs, Digi Mart USA News: It may be more tax-advantageous to leave pension money as an inheritance than to use it yourself. Now the OECD wants to change the principles for how pension capital is taxed when a person dies.

Carmine di Noia, Director for Financial and Enterprise Affairs at the OECD, points to how today’s tax rules in some pension systems can benefit those who leave money behind.

In some cases, pension capital is taxed more favorably when it is paid out to survivors than when the pensioner uses the money themselves, according to a report from Pensioner & Förmåner.

The OECD believes that funded pensions should primarily finance income during retirement. At the same time, in some systems pension capital can be transferred to survivors when the saver dies.

Such pension arrangements often have favorable tax treatment to encourage people to save for retirement.

However, the tax benefits can also make it more attractive to keep pension money in order to pass it on as an inheritance, rather than using it oneself.

In its Pensions Outlook report, the OECD sets out four overarching principles for taxing pension money at death.

The first is that pension capital should be taxed consistently before and after death. This should reduce the tax advantages of transferring money to heirs.

The second principle is that taxation should follow the policy goals of the pension system.

The third is that the rules should be coordinated with inheritance tax systems in countries where such taxes exist.

The fourth principle concerns considering how taxation affects pension savers, survivors and tax revenues.

The OECD particularly stresses that tax rules must not be designed in a way that encourages people to save less for retirement.

The organization’s starting point is that the main purpose of pension saving should be to provide people with income during their retirement years.

With these four principles, the OECD aims to counter a tax system that instead encourages people to hold on to pension capital in order to pass wealth on to the next generation.