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?

But Netherlands pensions are generally defined benefit. So the principle of building up sufficient DC funds to deal with the uncertainty of returns and how long you’re going to live is not something individuals have to take into consideration in the way we do here.

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

If you own assets over and above IHT then you are not paying it...the heirs will. I think no one should count inheritance as tax rules could change.

Op, you maybe in the tiny 1.5% if you accumulate a large pension AND you don't spend it before you pass. I don't think many people will be in that situation as average life span is over 80 and most people do intend on using their pension through gifts to children/grandchildren and holidays.

Because then far more people would pay IHT (currently fewer than 4%), and those who would pay under the current system would mostly end up paying much more!

This is true, but it misses the point about IHT. IHT is tax paid on money you haven't earned. Currently in the UK, there are people who put money into pensions to dodge IHT, then leave the pensions to their children. That isn't morally acceptable. This change closes a tax loophole. It's a great idea - we need fewer loopholes that let people get away with not paying tax.

"Its the singles I feel sorry for..."

You do realise that your FIL also has a £500k tax free allowance as well as your MIL? Even though they are divorced they can both individually leave £500k each to their children.

Because it's 10% from a much lower base.

Look at a practical example. A divorced parent leaves an estate including a home to their child and the estate is worth £500k.

In the UK there would be no IHT to pay. Under the Dutch system, there would be 47,710 to pay in tax.

He hasn't worked since 1992 and he went off to Thailand with the 100k from his divorce..he sent an email to his children recently saying he has to make provision for his Thai wife but if he dies before he makes his way to the British consulate, the laws of intestacy would apply and his Thai wife would inherit his pennies.

Not that we were expecting anything, my dh was expected to pay for his flight back from Thailand to see his dying father (dh's grandpa). He never did come.

Pension pots are the epitome of money that’s been earned.

Where’s your evidence for calling it a tax loophole?

Pension pots are the epitome of money that has not been taxed. Your income tax is calculated on what is left after you've made pension contributions. That's the whole point of paying money into a pension fund rather than just saving it up somewhere else!

Agree - and that money saved elsewhere would also be subject to IHT, of course.

So yes. Tax loophole, which I’m glad has been closed.

Your point being what?

I was responding to the poster who said that pensions weren’t earned.

My point being that it is a tax loophole!

Pensions are earned by the person working and then retiring. They are not earned by that person's children. So no, not earned by the person inheriting that money.

Thank you for making my point for me. Some people will go through any amount of mental gymnastics in order to explain why things shouldn't be taxed.

@RadioBamboo

I would suggest you look up the definition of tax loophole.

The treatment of uncrystallised pension funds today is a tax exemption, recognised under UK Trust law for 100 years, pensions tax laws and HMRC’s IHT manual.

Exemptions are not loopholes just because you don’t like the idea of them.

I suspect this may make better off couples more likely to marry rather than co-habit in order to pass to each other without inheritance tax.

Same goes for you @pointythings

No death in service benefits for anyone regardless of what pension scheme they’re in as far as you’re concerned then?

I haven't heard whether your pension pot becomes part of your estate. It may have been mentioned.

If it does, then this may affect how you expressed where your assets go in your will.

Exemption/loopholes is semantics. And just because it's been done for 100 years that doesn't mean it can't and shouldn't change!

I have no problem with taxing death in service benefits either. My DC got them from my late husband - US system. Federal tax paid before the funds were issued.

Honestly, the whining from people about paying taxes is sad.

What a good idea!

tax loophole

1. A provision in the laws governing taxation that allows people to reduce their taxes. The term has the connotation of an unintentional omission or obscurity in the law that allows the reduction of tax liability to a point below that intended by the framers of the law.

After the ceiling was taken off pension funds people increasingly started to use them as a vehicle for IHT planning rather than for retirement. That is not the purpose of the favourable tax treatment of pensions. It was a loophole which has been closed.

Thanks for the facts, good to see the reality amongst all the anecdotes.

Good job you don’t work in tax then.

I take it you were the person who paid the £200 voluntary tax last year to HMRC. I always knew it was a sanctimonious Mumsnetter

Are you worried about getting less work if tax loopholes get closed?

Pensions have always been used for IHT planning. I’ve worked in pensions for 35 years since the first DC funds were a thing and long before the ceiling you talk about removing was put on in the first place.

if they were a loophole they would’ve been closed a long time ago.

I’m not a tax advisor but I do find in any professional advice field that the right terminology is important. When we call something that is an exemption a loophole we give it a connotation of something surreptitious or furtive when it’s a perfectly reasonable part of financial planning.

And this thread is all about what different choices people might make around their finances as a result of the announcement, which is fair enough.