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

[LargeDeviation]

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.

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

@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.

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 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.

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.

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.

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.

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

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!

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.

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'.

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

We will now give the money to our children earlier, whilst we are alive. Better for everyone really since we get to see them getting the benefit of it.

There are two types of pension: Defined Benefit (aka Final Salary) and Defined Contribution. DB is a promise of an income for life, and therefore gets snuffed out when you and your spouse die. DC is simply a pot of (tax advantaged) money with your name on it. It belongs to you and therefore can be inherited when you die.

The pension you’re thinking of starting for your son will be a DC pension, probably a SIPP (Self Invested Personal Pension). It’s a great idea and in fifty years he’ll be very grateful.

This Budget changes nothing for your plans.

@Feelingstrange2 e2 Even if you agree with the principle of taxing pensions after death, do you agree with a 67% tax rate? I don't think anything should be taxed so highly apart from actively harmful drugs like tobacco.

@EuclidianGeometryFan I think 67% confiscation of assets is not fair.

@@HellofromJohnCraven Fair enough, but generally we want people to put away a bit more than they need in their pension for their old age in case they need care etc. With Rachel Reeve's changes today, the incentives are distorted. You should save what you estimate you need in your pension and not a penny more.

@BleachedJumper Pension funds make direct and indirect investments into the economy, allowing businesses to grow. Admittedly now they invest less in the UK than they used to, but that's mainly because the UK hasn't given good investment returns compared to other markets. That caveat about UK versus international investment aside, I see no reason why the economy would grow more or less if money is spent instead of invested.

@KeepingGoingOneDayAtATime I think you may be thinking about Defined Benefit pensions, where you get a certain annual income in retirement until you die, and then possibly your spouse gets a certain annual income until they die. I am talking only about Defined Contribution pensions where instead you pay into a pot during your working life, and then remove money from that pot in retirement, and if there's any left over, it goes to your pension beneficiaries. That is the main type of pension Rachel Reeves has slapped IHT on today.

@newmummycwharf1 Yes, it seems the 'give money directly to your loved ones and hope you live 7 years' approach is still acceptable, at least for one more budget.

@LargeDeviation

No I thought it would be 40%.

Although my plans are that the kids keep it as a pension fund for themselves, so will they get a 67% charge?

My DD has just bought a house and my son about to, so it's not particularly directed to be their house deposits.

I'm only 57 and I may need it, of course. At the moment I still.work part time and am an unpaid carer for my father, who has dementia and lives with us, so I don't have the ability to spend much. One day I hope to travel so maybe I can spend it and save 67%!

they will paid IHT on it at 40% and then when they take what is left out they will pay income tax on it

I've just caught the end of Rick Stein long weekend so that's one idea Also gifts of 3k a year each to the kids for deposit savings - will backdate a year as well. I will probably contribute to their living expenses when they start working so they can max out pensions with the tax relief and they can retire early. Talking of early retirement this does change my plans somewhat

Maybe it'll encourage them to keep.it until retirement then!

I will probably end up in a care home and it'll get chomped up in a few years on that anyway!

But, yes, 67 percent does seem very hefty. That's very true.

I've just had a pay rise and was thinking of adding the extra to my pension. Maybe I won't now.
I do need to do some retirement planning though.
I'm in the Civil Service and most people on retirement seem to take the maximum cash lump sum. Maybe I do the same and that's a contribution towards a house deposit for DC, or maybe I take the maximum monthly payment and pass regular smaller amounts to the DC. Hmmm. As PP, no real incentive to top up my AVCs.

The £3000 annual gift allowance (which hasn't been increased since 1981!) applies to you, not to the recipients - as far as I know.

So you won't be able to give £3000 + backdated £3000 to each of your children yourself (assuming you have more than 1 child) outside of Potentially Exempt Transfers? Of course, if you have a living spouse/civil partner then they would be able to use their annual gift allowance too.

People who are so concerned about passing their money on to help their relatives might consider doing so before they die. Instead of sitting in houses vastly larger than they need which seems to be the current preference of the older generation.

3000 is the donor, yes.

By backdated they mean if you didn't give 3000 last year you can do it this year too. But that's the only backdating there is.

You can give everyone 3000 each. That's the total. 3000 to one person or split it up over more.

This gift goes immediately out of your estate.

There are other gifts allowed like when children or grandchildren marry.

@Greenbike Thank you very much, that's extremely helpful.

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