Inheritance tax implications - difference between DB and DC pension schemes

[Pandersmum]

Can someone please explain to me (simply) the impact of yesterdays budget on the tax implications on the inheritance of pensions and the difference between ‘defined contribution’ pensions where your build your own pot to provide a pension and a ‘defined benefit’ where you don’t own a pot, but get a guaranteed pension value.

Does the change make defined benefit pensions even more valuable to the the recipient than before?

But if you’re saving for retirement, why are you concerned about the IHT treatment?

Are you married or single? Do you own your family home?

How do you figure that the number will be smaller. Any 3 bed semi in a London suburb will already use all IHT allowances, meaning any pension funds will put you over even if you have no other assets.
A figure of 8% has been quoted. It will be a massive headache for executors and pension schemes to administer and will delay probate at a time when funds are most needed.

OP I think you are confusing 2 issues.
DB is better for the claimant than DC.
There is no IHT on DB because there is (usually) nothing to inherit. Paying IHT on DC is annoying for your beneficiaries but it doesn’t make DB any better than it already is.

Yes but those in the public sector often have massively lower salaries as a result. I took a near 50pc pay cut to move from private to public sector and my role is senior and equivalent to the role I did in private.
One of the factors people argue for lower PS salaries is the pension

Where do you get your 8% number from? The figure of 1.5% of estates impacted is from government official figures in the link I posted

Ok. Thank you. As I said I am no financial expert which is why I asked the question. I genuinely appreciate all the different view points.

I guess I have a choice. Does that make me lucky not to have a DB scheme?

Should I continue to invest in my DC pot and accept if I die early that my descendants pay 40% or pay tax on the value of the contributions and invest the money elsewhere to support my retirement another way.

Definitely keep paying money into your DC pension. You get tax relief on contributions and 25% of what you take out will be tax free.

Married. 3 dependant children. Live in expensive part of the country. Have large mortgage on single family home. No rental or holiday properties. Deceased parents so no personal inheritance expectation.
Early 50’s. Expecting to work until 65+

Had genuinely been putting additional savings into DC pension to try and ensure I have a good pension.

Yesterdays budget has made me question my decision.

Yes DB pensions are much better but very few people outside the public sector able to get them.

What other investment vehicle are you imagining that wouldn't incur IHT?

How much do you expect to leave? In most cases, where there's a predececed spouse and property is being left to DC, you can leave £1m tax free. If you're talking more than that pay for some proper advice!

If someone is self employed they have no employer making contributions. There are massive “contributions” made by the taxpayer (government) to enable state employees to have generous benefits. Their salaries are not lower in many areas of work but can be lower than agency staff with meagre pension provision.

What this government does not like is inherited wealth but a self employed person is having to to put way more into their pension scheme than a state employee does for the same monthly pension. The reason a state employee cannot take their “pot” is because either the government has borrowed the money or is relying on tax to have enough to fund pensions. Mostly the former and paying 22% to Doctors exacerbates this. Generally state employees get better pensions and have paid less for them so only fair salaries take account of this. The self employed need to make the highest pension contributions and have annuities that can be a very poor return on savings. They are a lottery. Not something state employees ever have to worry about. Many are still getting getting gold plated pensions when compared to others.

If you expect to live off the pension, nothing has changed.

If you expect to leave savings to DC, the pension will now be treated the same way as a savings account or shares.

@Pandersmum Are you getting tax relief on your pension payments? Are you saving out of taxed income? Any savings you leave will be taxed for IHT now above the threshold that applies to you. So pension savings are still better if they are income tax free in terms of the payments being made before you are taxed. If from taxed income, they may not be the best savings vehicle now. But they could be. You also don’t know if future governments will have a rethink.

Many people cannot ever spend down to £0. Yes people live off their pension savings (draw down) but most don’t want them to run out! No pension pot - no income.

But you'll have had the tax benefits when paying in.

I always thought that the point of saving into a pension was to fund your retirement, not as another way of ensuring your kids have a decent inheritance??

I've always told my mother to use all her money to have a grand time and enjoy herself in her old age and not worry about leaving me anything - she's the one who earnt it, not me!

For saving for your retirement: nothing has changed. You should continue to save into your pension vs savings accounts as it will be far better

for inheritance: it will now be exactly the same as any other money you leave your children, and still better than a DB pension.

so you shouldn’t change anything

@whirlyhead Yes. Pension or draw down is the prime objective but people die early and leave a pension pot. If you have died at 75, there’s a lot left! It’s not intentional but happens. People might think they will live to 90 and budget for that but die much earlier leaving the pension fund. Saving and spending is not an exact science!

Yes and that's all fine, but no reason those residual savings shouldn't then be taxed like any other savings

Yes there are some pros to a DC compared to DB - particularly flexibility and the (now slightly reduced) inheritance benefits.

I think you’re being somewhat blinded by your outrage of the benefits of db schemes.

if your priority is for your own pension the tax benefits of dc pension contributions are difficult to beat

if your priority if your inheritance to your kids - then possibly saving elsewhere might be better - but doesn’t sound like that’s your situation.

i would crack on with putting as much as possible into your dc pension

So basically whoever of you and your DH dies first will be able to pass on everything to the other tax free (pension included).

Then the surviving spouse will have up to a million tax free to pass to your children plus 60% of what ever there is over a million.

(If your estate is worth less than £2 million).

https://www.gov.uk/inheritance-tax/passing-on-home

P.S am not a tax expert so happy to be put right if I have the rules wrong!

If you die before 68 (or the stated retirement age defined benefit pensions) or before you draw down significantly on a defined contribution pension it goes into your estate. You estate can be transferred to your spouse without tax. You then have £375k (£500k if includes property) for anyone else to inherit. (If you were married and your spouse has died before you you can double the allowances). This means very few people pay inheritance tax!!! Honestly most people don't have more than a couple of hundred thousand max in their pension pots, and many do not own significant assets otherwise. The panic here is reminiscent of the school fees complaints, this only affects those who are well off!

@messybutfun

Most of the U.K. do not live in London! A four bed detached here costs less than a London flat, and we aren't even in a cheap part of the country.