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Have they thought this through?
I don't know if this is an unintended consequence or what, but if there is indeed a stampede to pump money into pension schemes as an "IHT planning device for the rich" - with no intention of actually taking a pension then I can't see it lasting. Either there will be pages of anti-avoidance legislation to accompany it, or the next Labour Government will put a stop to it. I don't think it is safe for anyone to rely on this in making long term plans.
Previously ...
Previously if you were a 20% taxpayer (not wealthy!) and chose to stick money in your pension
Then to get it out on death cost 55%
Eh! how does that work? - so presumably you were going backwards with your pension
So forget a pension & use an ISA instead
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Pensions are a tax gamble. You are betting the rates when you take it out plus accumulated charges will be lower than the rate when you put it in.
Must admit the mind boggles as to why pension pots shouldn't even be on the table as part of your estate. I thought the idea of a pension was to provision for your old age, not to benefit your heirs with a low tax savings funds.
Clearing a couple of things up
Firstly, the tax break only happens if you die before you are 75 and are in full drawdown. If you are using the new flexible lump sum rules, you got this on your uncrystallised pot, if you are in DB or have purchased an annuity - no change.
For those over 75, there is a marginal reduction in the tax on death if you have residual funds in drawdown (down from 55 to 45%.)
According to the ONS, only about 11% of people reaching 65 die by 75, most die later.
So this is not the revolutionary tax-change George Osborne sold to the Tory Conference.
There is societal risk tied up in this...
"hurry up and die " may be a common enough thought from those nominated beneficiaries where the pensioner is in his or her 74th year - woe betide the old codger who seeks to insure against old age by buying an annuity!
There is political risk of the policy being reversed
I totally agree that there is political risk attaching to funding pensions for IHT purposes (thanks Jon).
JC - people get taxed at their marginal rate when taking money out of drawdown,the higher charge only applies on death an then only to the amount left in the pot.
Your point abut it being penal is well made, the reason the high charge was there was to stop pensions being used as an IHT avoidance mechanism.
We have ended up with a policy that doesn't do what it claims, makes pensions even more complicated and muddies the waters for people taking decisions at and beyond retirement!
The obvious solutions to JC's point would be to make drawdown subject to inheritance tax in the usual way. Those who need the tax-break would get it through the nil rate band and those who have inheritable wealth, will leave a tax bill to go with the pension pot.