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?

it’s just not possible for everyone to work for the public sector …. some people need to work in the private sector to pay the business taxes to fund the public sector!

Yes exactly. I wonder how many people in the public sector actually realise this and whether our Government even realises it!

We could cope without a public sector if we had to, but we can't cope without a private sector.

We could cope without a public sector if we had to, but we can't cope without a private sector.

How?

How would healthcare and education function?

How would people get to work without maintained roads?

How would many parents work without subsidies on childcare and the public sector staff to administer these? Etc

Yes, the private sector pays for the public sector, but clearly a country needs both.

If we HAD TO, we could privatise everything, but there is no way we could run a country without a private sector because there would be no taxes.

No, a country does not need both. If everyone worked in the private sector, everyone would just pay for for what they needed. If they wanted education, they would pay for it. If they wanted roads maintained, they would pay for it. If they wanted police, then they would pay for it.

It would be the extreme, but it is possible. But is not possilbe to just have a public sector with no private sector.

Let’s agree to disagree on that, then. I’m not going to change my view that every country needs both.

How would we prevent crime without a police force and a legal system, for example?

Because when you say “they” would pay for education and police and roads if “they” wanted it - those are all collective endeavours requiring collective payment and administration and BINGO - there are your taxes and your public sector.

As I said, it is the extreme and it would be very difficult but not impossible.

All I am saying is that you can't have a public sector without a private sector but in the exteme, you could have a country without a public sector, although it would be very difficult which is why no country has ever done it.

Public sector is not paid way below the private sector either! Why all this fuss about minimum wage if this was true. Some private sector jobs pay more but they are open to all.

My DH was self employed. What employer paid into his pension pot? None. All his savings. Just like standard savings but with no employer or government putting in a whacking amount. Yes, paid before tax but so is everyone else’s and they need to pay in far far less. The new rules clobber business owners who are also employers. Why there is such a dislike of business is unfathomable. As business takes risks, there would be no state employees if they didn’t. I don’t see why that is not recognised or understood. DH had 120 employees. Is that not a service to society? And they were well paid!

Perhaps they'd rather pass on 100 percent to their kids tax free instead of giving It to Starmer. Do you not think it wrong Starmer accepts £100k in freebies from strangers without paying tax yet doesn't want parents to help out their own kids?

Starmer didn’t invent inheritance tax, and there’s no requirement for a parent to leave their estate to their child.

Again, a large amount of money can still be passed down without any tax, and the budget simply added a few more asset types to what is included for IHT, leaving the rate and the thresholds the same as Hunt et al had them.

I’m sure they would, but that’s not how it works.

The intention behind pensions is for people to save it for their own retirement, not to pass it down to their children. I don’t think people should get tax relief to provide an inheritance.

I don’t agree with the MPs accepting free stuff either.

A huge pity they did not tax gifts from strangers like freebies football tickets, TS tickets, free dresses for PM's wife, free clothes for PM, free glasses etc etc.

What about MP'being able to accept gifts tax free yet parents not allowed to benefit their own kids without paying huge amounts of tax?

Parents can give however much they want to their kids, as long as they live for 7 years or it’s gifts out of income.

I don’t agree with MPs freebies, but at least they are largely being funded by private companies not the taxpayer. Why do you think your kids should get an inheritance funded by taxpayers (through the tax relief on pensions)?

Why should state employees get tax funded pensions and have so much in their pots that they don’t need to work beyond 55? The government funds some pensions by a whopping 28% contribution. Look at the state’s liability for employees’ pensions ! It’s massive.

If you are self employed no-one contributes to your pension but you. All employees/self employed pay into pensions before they are taxed but some get a substantial subsidy. Others get nothing and need to save at least 20% of what they earn. No state employee has to do that.

The self employed could then pass on the pension pot if they didn’t buy an annuity because they saved for all of it with no state contribution or employer contribution. . As annuity rates have been rock bottom, many pensioners are using draw down and get to keep a decreasing pot. It’s reprehensible that those who have to put more in are now taxed more than state employees or anyone else whilst getting less pension benefit.

@TizerorFizz how are the being taxed more?

@TizerorFizz i don’t think there are many public sector employees with a big enough pot to retire at 55. Did you have a particular group in mind?

More public sector pensions now are on a career average rather than final salary basis and the pot you build up is dependent on years worked.

IHT. Other state employees cannot pass it on but that’s because they only paid a much smaller percentage into the pot. The rest of it is employer or state. The self employed get no help in this way therefore could pass it to DC untaxed. It was a recognition that all their pension was their own contribution.

@SheilaFentiman I think you know who I mean. Go at 55 (ish) and do a bit of part time work for a few years afterwards. Why don’t we have enough Doctors do you think? They are taxed because their pension pots go over the max allowed (like others who have big pension pots) but get there so quickly they retire from full time work to avoid the tax burden being too onerous.

I thought that they had changed the doctor tax thing during covid?

But as a proportion of people receiving a state pension able to retire at 55 (or 57 I think now is the scheme minimum) it isn’t very many.

Regarding self employment- was the IHT “exemption” ever billed as a self employment benefit?

Osborne stopped annuities being compulsory in 2014 and before that, there was no pot to pass on.

There was a pot to pass on although with a 55% tax charge. However, IHT plus income tax will is likely to be substantially more for most people.

I thought that once an annuity was bought, it finished on death?

@SheilaFentiman Usually you bought an annuity but I think you could take a lower income and keep some to pass on. Annuity rates have been so awful they were not worth buying. We have a couple of products with guaranteed rates but mostly we will do draw down out of necessity. DH still doing some paid work at 70 plus.

The whole point is that self employed who put 100% into their pensions could have more flexibility as they would with standard savings. It might not be”billed” as such but it was seen as important.

What? How could the country cope without a public sector? Sorry but what a ridiculous statement.

The obvious problem is those who work in it not realising where most of the money comes from. Obviously most services could be run by private companies. Not desirable but certainly is possible.