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Pensions tax cut is a boost for IHT planners

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30th Sep 2014
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About 320,000 people who retire with defined contribution pension savings each year will no longer have to worry about their pension savings being taxed at 55% on death, HM Treasury announced yesterday as the chancellor addressed the Conservative party conference.

Tom McPhail, head of pensions research at Hargreaves Lansdowne, said the change was likely to encourage investors to take maximum possible advantage of their pension contribution allowances. “You can now build up your pension fund, knowing you can not only draw on your savings without the current restrictions from age 55, but also pass on any unused savings to beneficiaries tax free on death,” he said.

But some commentators suggested that the move would be of most benefit to wealthy individuals seeking to avoid inheritance tax. Pension funds are normally held in trust, outside the member’s estate for inheritance tax purposes. The Daily Mail reported that “plans to axe death taxes on pension pots could trigger a stampede from savers switching cash from bank accounts into retirement schemes to avoid inheritance tax”.

Osborne told the conference: “There are still rules that say you can’t pass on to the next generation any of your pension pot when you die, without paying a punitive 55% of it in tax. I could choose to cut this tax rate. Instead, I choose to abolish it altogether.”

He added: “People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free.”

The Treasury said that from April 2015 anyone who dies below age 75 will be able to “give their remaining defined contribution pension to anyone completely tax free, whether it is in a drawdown account or untouched as long as it is paid out in lump sums or is taken through a flexi access drawdown account”.

It continued: “This does not apply to annuities or scheme pensions. Those aged 75 or over when they die will be able to pass their defined contribution pension to any beneficiary who will then be able to draw down on it at their marginal rate of income tax.”

The lifetime allowance will remain unchanged at £1.25m.

John Cridland, director-general at the CBI, said: “There is a real issue in the UK with people not saving enough for retirement, especially as we are now enjoying longer lives. The government should also commit to keeping the higher rate of tax relief on pensions, as we try to rebuild our savings culture.”

But advisers say the wealthy have the most to gain from the reform, the Financial Times reported.

Richard Dyson, personal finance editor at the Telegraph, wrote: “First came George Osborne's revolutionary Budget in March, which from next April will give savers full access to their pension pots and abolish the requirement to buy often poor-value annuities. Now comes the latest boost: the potential to use pensions as a way to avoid inheritance tax.”

Dyson said: “It will be a big incentive for older, especially wealthy, earners to top up their pensions. While the 55% tax remained in place, putting spare cash into a pension wasn't a very appealing idea.

“Say someone in their late 50s already had an estate valued at more than the IHT threshold, as well as adequate retirement income lined up. They would probably be advised to start giving away money or other assets to their children, rather than putting it into a pension. They'd need to survive seven years having made the gift, but then there would be no tax payable by the beneficiaries.

“Now, with the 55% tax abolished, putting excess cash into a pension is suddenly back on the list of potentially worthwhile options.”

Tax campaigner Richard Murphy said Osborne had created “the most perfect tax free way for the wealthy to not only pass money between generations but to actually claim a tax subsidy whilst doing so”.

The “quite staggering” result was “triple non-taxation for the wealthy”, he argued.

ICAEW chief executive Michael Izza said the chancellor’s decision was logical, but would add yet more changes to both the tax system and pensions regime, which are “already among the most complex in the world”.

Replies (4)

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By jon_griffey
30th Sep 2014 13:49

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.

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By User deleted
30th Sep 2014 17:00

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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By ireallyshouldknowthisbut
01st Oct 2014 12:43

.

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.

 

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By Henry Tapper
02nd Oct 2014 07:04

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.

 

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