Inheritance tax on pensions - would this be an effective tax rate of up to 67%?

Rather idealistic. People will just give lump sums to their children while still alive instead of leaving it in their will. I guess you think that is unfair too.

I understand on Moneysaving website and Telegraph Money that if your pension pot is left to spouse it’s free of tax even after 2027 when the change kicks in.

Couldn’t you just do a Deed of Variation of your late spouses will to leave to your grown up children if you didn’t need it yourself?

They have worked hard to pay the mortgage off most likely. Could have paid rent and spent the rest on holidays and living life. May have opted to go for that promotion to earn enough to buy their own home which they pay for over 25-30 years including interest to their bank and enable others to avail themselves of state-subsidised housing - thereby saving the taxpayer money

The proportion of people who buy a house outright without a mortgage- infact less than 5% according to the stats.

So this idea that house wealth is some sort of pot-luck needs checking.

It is good to support public services by contributing a portion of earning via tax - including accumulated wealth. But this idea that wealth generated is just luck needs to be quenched. Why would the next generation work hard or aspire - if they are told it is not in their hands to some extent?

We should be striving to ensure we 'create luck' for the next generation

If the majority of an estate is a house bought 30 or 40 years ago it’s money nobody’s worked their arse off for and it’s never been taxed. A share of a tax free £1 million windfall should surely be enough for anyone.

I suppose the question of fairness is this: an individual may have worked 10 hour days to accumulate said wealth, taken promotions with increasing responsibility and stress thinking their descendants will benefit and won't have to work as hard. If 67% is taken by the government and used for public services - great for the government, great for the public, but not so great for the person that made the extra sacrifice. Many people choose to coast a little, spend more time with family, work less etx and earn less and thus accumulate less. That is also perfectly fine. What is the incentive for the individual that goes the extra mile?

Do we want to discourage that? How does that affect society longterm? I guess such people have less and we all have less to share

Not all wealth is stroke of luck, right place at the right time - I can see the virtue in taxing that at 67%. Others are accumulated by specific planned strategy and some policy actions discourage such individuals.

I still think there are ways around it anyway - give now, spend now, invest in your offspring and grandchildren now. Pay their private fees etx. Whilst we increase minimum wage, we need to incentivise those who are willing to innovate, take risk, go the extra mile

@Brananan They have stopped it so there is now no problem. Job done

So what's the problem?

The beneficiaries will only pay income tax on the drawings from the pension if they are over the threshold in that year. They could leave it until they retire, then take out only just enough to top up their income to the tax free threshold.

Either live like a poor person, or take the income and pay the tax.

@Brananan FOY i used to work for HMRC many moons ago. All peeps earning over a certain amount, will have accountants advice to divert a level of income into inheritable pension funds. As such this diversion attracted retirement annuity relief.

And avoided IHT. Perfectly legal.

My case load was higher earners, and the annual diversions were massive. We are talking early 1990’s and million plus per annum.

My mum did this too on sound tax avoidance advice.

Which?

We were hoping to pass some of our pensions on to our children when we die. However, I think this is a fair cop! I have not read all of the links, but had you not put money into the pension you would have been taxed on it so maybe it is right that you pay inheritance tax on a taxed pension.
Our income is made up of state pensions, DC pensions that we can take when we want and stocks and shares ISAs that we have changed from investment to income. We have saved in the ISAs for a long time. I have really appreciated the ISAs as because as they are tax free we are only basic rate tax payers therefore if we pay any CGT on other things it will be at the lower rate.
Yes like other people on this thread we are spending more which goes against our nature. We are also giving some to our children. If only we knew when we would die! At least the time limit wasn’t changed to 10 years.
A poster on here suggested that she would be paying for her children’s holidays because if you pay an amount to a holiday company they don’t know that the holiday is not for you.
Now off the read the links!

They spotted a tax avoidance scheme for the rich, which is great

@MrsJoanDanvers spot on.

I know it makes for an inflammatory % but is it a given that if the beneficiary taking an income would pay 40% or could it be 0% through the other income tax rates up to the highest band, depending on their other income?

Trying to look at the substance - the 'deal' between the state and individual for the privileged tax treatment of pensions concerning contributions and returns within the pot is to encourage people to save for their retirement by using income before tax and for the investment returns to be untaxed as well.

As with AIM investments, farm and business reliefs, they have become vehicles for the very wealthy to park wealth outside the provisions of IHT. The budget has changed provisions to try and maintain the substantive purpose of the vehicles while trying to reduce their use as a vehicle for avoiding IHT. Arguably the changes to agricultural reliefs will cause more trouble and difficulties for 'working' family farms though there has been a significant problem with billi9onaires buyug huge farms for IHT relief.

The changes to pensions wouldn't appear to change anyone's ability to save for their retirement then use the saved funds plus investment returns, just reduce the ability for people to use their DC pension as a vehicle to avoid IHT.

The alternative would sound a little fruity - the 'deal' between the state and individual for the privileged tax treatment of pensions concerning contributions and returns within the pot is to encourage people to save for their retirement and to be able to pass money to their beneficiaries outside IHT. Why would the state want to encourage that at a time when the UK has a large public debt and is running a significant deficit and public services have had significant under-investment for many years?

Pensions were never designed to be IHT avoidance! They are there for retirement. If you’ve money left over in your pot as a bonus, then why shouldn’t it be part of your estate? Don’t forget, nil between spouses and dual allowance for direct descendants so it’s only if your assets are over £1m. I can’t understand people saying they’re not going to save into a pension because IHT. So you’d miss out on tax relief at your marginal rate plus the ability to draw 25% tax free because you’re worried about tax when you’re dead? Your kids will still inherit up to £1m tax free!

But the income tax on withdrawing the pension is the income tax that was not paid on the money put into the pension. So it is the same result as inheriting money in an ISA, just the pension pot looks more but it is isn't.

Eg if £100 of Dads wages would =100 in a pension or (taxed at 20% before putting in) 80 in an ISA.

Child inherits and pays 40%. pension = 60 ISA =48.
Pension pot is paid to child 20% tax remainder = 48. ISA no tax = 48

I stand corrected, @Notsuchafattynow , nil rate for a £500k estate. So if that person dies with anything above £175k in non property assets that money will be taxed twice (IHT and income tax). This is such a disincentive to save into a pension and look after yourself in old age, beyond the basics of what you’ll need.

There are ways to plan IHT if you have assets worth more than £1m. Just need good advice

Generally where there are husband and wife with a house worth £350k and kids you will still need an estate of more than £1m for them to pay inheritance tax on your pension. Not many people have that.

the government has estimated that of 238,000 estates assessed, only 10,500 would be affected by the new rules where they were not affected under old rules.

It is more likely to affect those who would have already paid inheritance tax on their estates and have pensions which would have previously been excluded. Their tax bill is likely to increase by around £34,000 based on previous data according to the report.

If you have the more than £1m then your kids are going to inherit a shit load of money regardless.

Pensions were not designed as inheritance tax savings products. Until 2016 the tax on death on non spouse beneficiaries was 55%!

I think this is fair as long as they allow IHT to be paid directly from the pension pot. Tax hasn’t been paid on the way into a pension, so should be paid on the way out. Beneficiaries will pay that at the time they choose when they draw the money out of the pension. IHT is on top, just like any other asset at death. You can still leave £1m to your kids and infinite amounts to your spouse tax free, which is plenty. Pensions should be for retirement income, not an IHT planning tool. Yes, people may put more into ISAs instead and the government would be entirely happy with that. They’re capped anyway so most people in the IHT bracket will already be maxing them out each year.

If you've enough in a pension to be able to live through retirement, care costs etc and have a chunk left to pass to your heirs, you're much better off than the average person.

The average DC pension pot at 65 is £194k. That will quickly be eaten up by a 20 year retirement. Very, very few people leave sizeable pension pots in their estates, those that do are wealthy.

@Notsuchafattynow Why should they? What if they've worked their arse off to get to where they are?

I don't get the concern here. If you inherit a pension pot thats free money you've not had to earn. What does it matter if some of its been taxed? You've still been gifted free money.

It doesn't matter if the money get taxed a few times. You don't want big pots of money accumulating to small numbers of people, you want wealth shared so it benefits everyone.

If they have more than a million in assets, then good. They should pay IHT.

If she leaves the house to a child etc she'll get an additional 175k so £500k before IHT kicks in?