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Original poster

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

87 replies

LargeDeviation · 30/10/2024 17:37

It's unclear to me how this will work - at the moment, if I understand correctly, most defined contribution pensions are passed on free of inheritance tax to beneficiaries, but if the person who died was over 75, then any sum taken out of the pension by the beneficiary is added on to the beneficiary's income and taxed at income tax.

Will IHT be on top of this?

Assuming £1M non-pension estate and £1M nil rate band including primary residence/spousal transfer, IHT would leave 60% of the original pension pot - and then that remainder would be further taxed at up to 45% if any money is actually taken out by the beneficiary?

Whether or not you agree with inheritance tax on pensions, surely once the money is taxed (whether at income tax rates or inheritance tax rates) it should not be taxed again to be accessible to a beneficiary?

If Rachel Reeves is proposing double taxation at an effective 67% rate then it would be a major disincentive to pay into DC pensions if you even think your estate could possibly get close to the IHT nil rate threshold.

OP posts:
Feelingstrange2 · 30/10/2024 18:45

There are different types of pensions. That's why it seems confusing.

A civil servant, for example will be paid a monthly pension which then has some degree of payment to any widow/widower and then stops generally.

I was self employed before I retired so had to save for my own pension. I have a pension pot and those pots can be passed onto our beneficiaries free of IHT. After this change, that will not be the case anymore.

Many people even in employment have these pots now because the other type of pension is very expensive thing to offer.

Some people buy annuities with their savings pot and then those act more like the first type I mentioned.

They are confusing but a stakeholder pension will be one of the savings pot type you mention

newmummycwharf1 · 30/10/2024 18:44

Simply spend on your kids whilst you are living. Use pension lump sums to for house deposits for them etc. Good for the economy and great for your descendants too. It is absolutely correct that they benefit from your hard work, luck and strategic choices.

The strategy just has to be 'how to make the best decisions to look after myself in retirement and make sure my descendants have a head start or soft landing'.

KeepingGoingOneDayAtATime · 30/10/2024 18:40

I'm really confused about this. I thought that only a spouse kept the pension when someone died, and when they both have died, the pension sort of got snuffed out like a candle. Is there some complicated weirdness that I don't know about?

I've been thinking of starting a stakeholder pension for my DS, so as to use the compound interest over his lifetime to have the chance of a decent pension in his retirement. He also has a junior ISA. I'm really confused now about what all this means for his situation.

Feelingstrange2 · 30/10/2024 18:39

Yep!

As I say, I do actually agree with her provision.

Even better she did it when I am 57 so I have plenty of time to write my shopping and travel list!

BleachedJumper · 30/10/2024 18:34

You know what, that sounds great for the economy @DavidBattenburgh @Feelingstrange2 !

EuclidianGeometryFan · 30/10/2024 18:34

DavidBattenburgh · 30/10/2024 18:17

I'm 55 and we have been planning for years. Normal size family home but good pension contributions as we don't have an extravagant lifestyle and had to save it somewhere. While I appreciate we are incredibly lucky to have this issue I feel the only way now to reduce the kids IHT burden by spending it Grin It would've been left fully intact to cover care home fees if they were needed. I've started a list this afternoon.

Is it not possible to take it out of the pension, or at least stop putting more in, and save it in a normal savings account for the care home fees?
No need to spend for the sake of it.

HellofromJohnCraven · 30/10/2024 18:33

Well surely the whole point is to save enough money to fund your own retirement? You benefit from 25/40% tax relief as an incentive to save for your own retirement, not as a tax free way to pass money to others.

EuclidianGeometryFan · 30/10/2024 18:32

Fundamentally, this seems to stem from a dislike of the idea of saving money and giving it away to the people you love when you die, in favour of spending down your assets frivously and frittering away any margin of safety.

Nothing wrong with that as a principle. Inheritance is basically unfair - some get it and some don't. It just entrenches intergenerational privilege.
Money spent before you die circulates in the economy, boosting growth. Money passed on to buy your kid a house remains tied up in assets.

Feelingstrange2 · 30/10/2024 18:23

DavidBattenburgh · 30/10/2024 18:17

I'm 55 and we have been planning for years. Normal size family home but good pension contributions as we don't have an extravagant lifestyle and had to save it somewhere. While I appreciate we are incredibly lucky to have this issue I feel the only way now to reduce the kids IHT burden by spending it Grin It would've been left fully intact to cover care home fees if they were needed. I've started a list this afternoon.

Me too!

I've got a shed load of savings to spend now in my retirement. I was giving it to my kids - actually to give them a decent pension fund top up as high house prices and cost of living have stopped them paying in as much as I did.

I don't actually.disagree with RR decision even though it does have a huge tax charge for our beneficiaries when it comes in.

DavidBattenburgh · 30/10/2024 18:17

I'm 55 and we have been planning for years. Normal size family home but good pension contributions as we don't have an extravagant lifestyle and had to save it somewhere. While I appreciate we are incredibly lucky to have this issue I feel the only way now to reduce the kids IHT burden by spending it Grin It would've been left fully intact to cover care home fees if they were needed. I've started a list this afternoon.

Original poster
LargeDeviation · 30/10/2024 18:06

@WutheringTights Thank you, that is a very useful link.

ISAs are exempt from dividend/capital gains too. Reeves has created a distortion incentivising saving into ISAs relative to pensions. The former will only be taxed once when you die. The latter will be taxed twice.

No doubt Rachel Reeves would argue that you get tax relief on pensions 'on the way in' making the two treatments 'equal', but I doubt beneficiaries will look favourably on this viewpoint when they have to fork out up to 67% tax.

Now, there is little incentive to save into a pension beyond what you think you will 'need' for retirement - any excess will be punished. Fundamentally, this seems to stem from a dislike of the idea of saving money and giving it away to the people you love when you die, in favour of spending down your assets frivously and frittering away any margin of safety.

OP posts:
WutheringTights · 30/10/2024 17:52

I haven’t looked at this in any detail, but from a quick look at the consultation on the HMRC website, I think you’re right. I think it’s specifically targeted at individuals using pensions solely as a means to avoid IHT as so few estates actually suffer IHT.

Remember that the returns on the investments in the pension wrapper are still tax free, unlike if you inherit other types of asset.

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment#part-1-introduction

Technical consultation - Inheritance Tax on pensions: liability, reporting and payment

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/technical-consultation-inheritance-tax-on-pensions-liability-reporting-and-payment#part-1-introduction