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.

Most people don’t buy an annuity with their DC pension these days. They just take the natural investment income from it or spend it down, or both.

I don’t see how subjecting people to 67% tax is “closing a loophole.” It’s just a cackhanded action by people who didn’t properly think through how the new tax would interact with an existing one, and are now too embarrassed to admit their mistake.

You are absolutely right.

Subjecting pensions to inheritance tax will accelerate The Great Wealth Transfer by asset rich parents. They will simply spend their pension on retirement instead and gift their ISAs and other assets to their children early and hopefully live 7 years more to keep 40% away from the tax man. This will widen the gap between children who are the fortunate beneficiaries of the transfer quite early on in their lives v. those who do not have such gifts ever. How dispiriting it must be to graduate from the same class at uni to see your contemporary have a house, car and nice holidays and gaining experience doing free internships almost right away. In my time, you would be middle-aged to get the bulk via inheritance. Not any more.

It is also true about sapping the productivity of the 50+. I know as I am one of them. There is no longer any incentive to build up my pension, so I can work fewer hours and take on a less demanding job to plateau into retirement. It is tempting.

but you pay tax when you or whoever inherits draws the money out (apart from tax free lump sum)

I think it is fair that the tax relief on pensions allows you to built a suitable fund for your own retirement from your earned salary. Governments should be encouraging saving so that pensioners can fund themselves rather than being funded by the state. The state pension is a separate but sensible part of a government's duty. It makes no sense for this fund to be exempt from inheritance taxes - it is no different to other inheritance assets - once it has been used for its purpose.

But a pension was never intended to be a vehicle for tax-free inheritance. That's the point. The tax-free element of pension savings was intended to be for your pension - not an inheritance for your children/beneficiaries.

It's no more "double-taxed" than non-pension investments, because it was not taxed before it went into the pension fund. Adding IHT brings it into line with other inherited assets, taxing on withdrawal at the marginal rate is then the missing tax that wasn't paid on it originally.

Yes with the hope that it gets relief at a higher rate than it is taxed on when it comes out. Your beneficiaries don't pay IHT. Your estate does. And as others have said that'll now be the point at which it (any undrawn balance) is taxed.

There are a many over 50 year olds in the gym and running marathons. Many people are not worn out and perpetuating this type of thing makes it hard for over 50s and 60s to get jobs.

A few may have illnesses but many are very fit especially if they don’t drink, smoke and are not particularly over weight.

Tax has already been paid on the money paid into ISAs though

One thing we did years ago was start an insurance policy on the second life (whoever dies second and last out of the two parents), written in trust with our children as beneficiaries. The premiums are reasonable as we started early. They will receive a lump sum falling outside our estate so no IHT. But they will use the money to pay towards the IHT bill for the house and other assets such as ISAs and pensions.

Which is the same as any other asset that is subject to iht it’s paid by the estate, but the estate doesn’t pay the income tax it’s the beneficiaries if they take the money out. If the person had taken the money out of the pension before they died they would have paid tax on it, that money would then be in their estate and charged to IHT. Why should the fact it’s a pension mean it’s not subject to IHT or income tax?

But with ISAs you can take that money out and spend it whenever you need it. There is no longer the same incentive to lock money away out of reach in a pension until you’re 57.

We will actually probably now retire earlier.

There’s a massive incentive, I put £6000 in a pension last week, it’s already worth £7500 as the pension company claimed the basic rate tax and then I will claim the higher rate tax through my tax return which is another £1500, plus I get to keep my child benefit, so it’s already worth £9000 even ignoring the child benefit compared to if I’d put the money in an isa it would still be at £6000. Ok I will have to pay tax when I take the money out but I will do this when I am retired and not in higher rate tax so I will pay basic rate tax on the pension income whilst having got higher rate relief on the way in. Pensions aren’t supposed to be inheritance tax tools they are for saving and making providing for your own retirement.