What does this mean for people and pensions?

[imastrangerheremyself]

If pensions are to be taxed as part of inheritance how will this affect the way people view them?
Will it be - there's no point in putting more away now so let's enjoy our money now? This is something that will in two years time drastically reduce the wealth of everyone who has a pension and home.
Will people downsize their homes to ridiculous levels to try to reduce their level?
What about people who live in the SE where a 3 bed house may well be 1/2 a million compared to areas where it is half of this? Surely that is an unfair start line too?

I don't think the pension thing will particularly change behaviour. For those that have sufficient other assets to live off, they might have kept a pension untouched but that can't be relevant for most people.
I think pensions should be taxable given they were given tax relief when they were created in the first place.

I do think the house prices in the south east are a problem when a relatively "standard" house can easily exceed the inheritance tax threshold.

I feel for genuine farmers who have large land assets and need it for their income but probably not much cash to pay inheritance bills.

I mean I am planning to spend my pension on living expenses when I am retired, you know as intended. Hopefully it will stop very wealthy people using pension pots as an a inheritance tax avoidance vehicle.

I would like to know the stats for the amount of people that thought that pensions could be passed to others after death (expect spouses) my guess is that most people believe pensions are for saving for your own retirement.

I don't think people expect to be leaving their pension to anyone (except maybe a spouse, which is still exempt) when they set it up to fund their retirement?

If people have been using them as a savings vehicle to avoid IHT, then it's right and proper that that loophole has been closed.

It's about stopping tax evasion by the wealthy, as far as I can see. It doesn't apply to the vast majority.

"In recent years, pension schemes have been increasingly used and marketed as a tax planning tool to transfer wealth without an Inheritance Tax charge, rather than for their intended purpose of funding retirement" (gov.uk website).

Apparently affects 1.5% of pensions (gov.uk).

For the vast majority of us, a pension is used to fund a reasonable standard of living in retirement. That isn't affected.

For a small minority, they were using pensions to avoid inheritance tax due to what was effectively a loophole. Now that won't be possible any more.

Pensions continue to function is intended, they were never intended to be an instrument for inheritance.

I’ve been responding on another thread about this OP. Practically I think that it will change the focus of advice at retirement as it will make more sense to disinvest from pension assets rather than leave invested as previously it would’ve been more sensible to take income from non-taxable assets or at least a mixture of the two. Annuities will become more popular again if interest rates stay high.

This is one of those typical things on Mumsnet where people have no interest or cheer it on until it affects them. So in 20 years time when their pension pots and the value of their house now mean that they are paying IHT on their overall assets they will then realise the impact of it

I'm affected, I still think it makes sense to close the loophole of a savings vehicle that avoids inheritance tax.

This is something that will in two years time drastically reduce the wealth of everyone who has a pension and home

It really won't unless they have a very valuable home that they own outright and likely paid a fraction of the current value for and/or have been using their pension to avoid tax rather than to fund their own retirement.

The vast majority of people won't be affected at all.

^ Exactly this !! Well said.

Won’t impact most people at all.

@AuntieJoyce ok I'll bite. I am a person of fairly ok means. I own a London flat and have a decent pension pot. How will I be badly affected? I have a pension pot I am building up in order to buy an annuity to fund my retirement. Which I will then spend on my living expenses.

If I die before I withdraw it or spend it it goes to Mr Monkey, my nominee. Given its current value and the nil band I can transfer to Mr Monkey for our flat, my estate would probably still be under the IHT threshold.

Well you are already benefiting from the nil rate band which I don’t. Maybe that will go in the future now they’ve started tinkering with IHT. And maybe your pot will be larger by then and the 40% tax will start to bite .

As I said above it doesn’t impact people today but in 20 years time everyone will be back on here and chelping like fuck. Or more likely continuing to virtue signal away about how they can’t wait to give cash away when in reality the whole nation paid just 200 quid in voluntary tax at the last count.

Other than people in nice public sector defined benefit schemes

I too will be now looking at buying annuities when previously I wouldn’t in the past because they’ve been extremely bad value for money since 2008 until interest rate started to rise. Now I’d rather take a hit on VFM and not be taxed at 40%. So I’ll be aiming to die with £500k and not a penny more. I am ideologically opposed to IHT though which I appreciate is a view not shared on here

You're aiming to die with £500k? That makes you a LOT richer than most. I am aiming to spend my pension money because that is what I am saving it for, not to hoard throughout my old age like a jealous dragon.

I don't care about IHT cos I'll be dead when it is owed.

That will hopefully be my house value by then. All my other assets I am planning to spend or gift to my children. Leaving nothing left for the taxman

It’s really not that unusual for people who have paid off their mortgages by retirement to have a house valued at £500k or more

That is your right. I don't see this as an issue. Spend your pension, it is what it's there for.

It's time for a change of mindset. The only thing you can pass to your kids now that won't be taxed is your time and attention. Work doesn't make sense any more beyond meeting your expenses. Plan to work less, retire early, pay less/very little in taxes, put nothing more into pensions and just enjoy raising the children and giving them the best start in life and the best memories. You can still give them an edge that way.

Or just transfer the assets 7 years early, which of course is tricky with a pension.

You know most people don't pass their pension pot on to their kids because - well - they have to spend it.

And if you were using a pension to save money to pass on tax free then you were abusing the pension system and that loophole is now closed.

You would have to be doing extremely well to be affected by this wouldn’t you! Presumably it’s designed to release some of that into the economy and get older people to spend.

If you don't have assets enough to attract IHT would the pension still be taxed?

My DC in their 20s have recently set up SIPPs. Of course there is never a guarantee that you'll live to pension age but at least if your (future) children got the pension it would be something?

I could never understand the logic of why they were excluded from IHT - does anyone know the logic?

To encourage people to save in their pension and not rely on the state.

Annuities will become more popular again if interest rates stay high.

Probably.
For years the annuity rates were so crap that it seemed better to do drawdown. But that's a gamble on how long you'll live so you really had to save more to cover yourself (and it'd still be nothing like as good as an index linked final salary scheme). I think this is what lead to some people having money left over at the end to pass on rather than any sort of IHT planning.