Legal challenge to incorporation of DC pensions for IHT purposes?

[Yetanothercrazycatlady]

Has anyone seen anything about a legal challenge to the incorporation of unspent DC pensions into estates for IHT purposes? The farmers have a lot going on in the media which is likely to eclipse it. I would have thought there would be some formal objections, even on the timeline. This policy could be construed as a tax an early death/ terminal illness. Surely someone would pick up on this?

Furthermore, I don’t see a Tax Information and Impact Note listed about it :
https://www.gov.uk/government/collections/tax-information-and-impact-notes-tiins#autumn-budget-2024

Someone may have spent the last ten years up to their retirement loading up their pension and living off savings, only to be told the tax treatment will change in just over two years. Or is the tax impact considered irrelevant as it’s not on individuals but estates?

What would the legal basis of any challenge be? 'This policy could be construed as a tax an early death/ terminal illness.' doesn't sound like any sort of legal argument to me, anything not in a pension is taxed if you die early.

Tbh - and I'm someone with a fairly decent private pension pot and savings so my dd will probably lose a significant sum at the end of the (my!) day - I think pensions not being included in the estate for IHT always was an anomaly. It used to be that you had to buy an annuity at a certain point so there wouldn't be money left in it at the end anyway.

They're pensions not inheritance tax vehicles.

I have one, my estate will be affected but I can't argue the logic.

Tbh the unfairness now isn't that pensions are included in IHT, it's that we're left with the seriously wealthy still having 'inheritance tax vehicles' available.

There is a consultation going out to the pension industry, and as I understand it it is going to be practically impossible to administer.

The legal challenge might be that you cannot tax the same money four times over, and you are treating the private sector in a disproportionately punitive way compared to the public sector.

Having spoken to our financial advisor, annuity rates are going back up, and are now a more attractive option again. So take your 20% now. Then you reduce your remaining pot, by using a proportion of what's left for an annuity, leave the rest as cash, spend lots, give lots away now, in you 60's, and then rely on the state for social care when you are old and poor.

Thanks for your replies. It does seem unjust that private sector pension holders will be treated more punitively. I guess the practicality of this approach doesn’t warrant a legal challenge, though.

Sound advice, @KnittedCardi , my withdrawl of the TFLS will complete this tax year. Partial annuity is the way to go, once interest rates will inevitably rise. Maybe this is the nudge to throw in the towel and spend, spend, spend but that doesn’t come naturally to me. I won’t trust the state to look after me in my dotage. They’ll have changed the rules again by then!

Since when could a public sector DB scheme allow you to leave a pot of cash for your relatives?

Exactly, there's no comparison because a public sector pension has no pot so is not part of your estate.

Public sector schemes pay survivors' pensions to widows and, if you die in service, a pension for minor children.

But that's a feature of other DB schemes and can be an add on, probably on an insurance basis, for DC schemes.

But there's many "no comparisons". Your DB scheme doesn't rely on stock market performance, it is a guaranteed monthly sum, which rises in line with inflation, for you and your spouse until you both die, your employer puts in a huge percentage every month, and the government under-writes it for you. You do also get a tax free lump sum on retirement.

Additionally, private sector doesn't have those schemes, so you have no choice but to save into a private pension. Which you are now being penalised for doing!

@KnittedCardi I have a defined contribution with a pot not a public sector pension.

The legal challenge might be that you cannot tax the same money four times over, and you are treating the private sector in a disproportionately punitive way compared to the public sector.

How is it being taxed four times over? You contributions go in without being taxed. Instead, it's taxed at your (or your beneficiaries) marginal rate on the way out. Including it in IHT is making it overall the same as non pension investments isn't it?

Tbh the big disparity between dc and public sector/any other decent DB schemes is the amount of uncertainty and work it can take managing your own investments. Changing rules makes it hard to plan, and that's compounded in spades by what's going on in the financial world. We have to worry so much more about inflation, stock and bond markets (or if you don't worry and so don't make the right decisions at the right times, suffer financially.)

I'm more worried about wtf the combination of labour policies combined with Trump protectionism is going to do to the economy.

Your pension contribution isn’t taxed. It goes out of gross pay. Which is why people up contributions to keep them below tax bands, remain eligible for child benefit or whatever. Also there are different arrangements in pension funds for death in service. It is only when you retire that things change. But when you get to making decisions re what to do with your ‘pot’ you simply look at that advice and will have some idea of how retirement/death planning can be best arranged.

'simply'? 😂 'some idea of how retirement/death planning can be best arranged' ...some idea, but so much uncertainty.

OK, I get confused but, this my poor understanding, and based on high earners living in the South East or London with a big pot:

You pay into your pot tax free, but have to claim the additional 20%, but can be in a position where you are over the thresholds, and pay an additional 5%.

You can take 25% from your pot tax free

When you draw down or have an annuity this is taxed income

If you have a large estate, house worth a million, pension pot of a million, your estate will be taxed if passed to your children

Additionally your children will then be taxed when they take the drawdown as income

If your estate is over 2 million you lose your allowances under a taper system

Someone, somewhere, calculated this as a tax take of 80+% in the same money.

I think.... I will try to find the analysis where this was shown

Yes except...
if you die before 75 then the pension can be drawn tax free (the change now is that the pot itself will form part of your estate)

You also get 100% tax relief on paying in.

Only if the pot owner dies after 75

Sorry posted too soon

Only if the pot holder dies after 75 will the pot be subject to both IHT (if estate is large enough) and income tax.

The transfer of wealth down the generations is one of the biggest causes of inequality in our society. To give the wealthiest tax breaks to do so was absurd.

The age 75 thing was always a weird anomaly that surely everyone expected wouldn't carry on.

The wealthiest can still do family trusts etc though.

Doesn't that encourage people to die before 75, so they can pass their wealth onto their children? I'm joking of course .... But .....

Yeah, dh used to joke about what to do if he was given a week to live six days before his 75th. It was a really odd, rather inexplicable 'cliff edge'. Maybe it was some sort of leftover from when (I think) any remaining pot had to be put into an annuity when you turned 75?

DH thinks he's cracked it anyway. Spent all weekend putting together updated spreadsheets. It will actually mean we officially "retire" now rather than later, in order to use as much tax free allowance as we can, plan to get an annuity asap, and live it up!

Additionally, he has worked out if he had stayed in the NHS, he didn't obviously, his monthly pension would have been a third larger than it will be under his own SIPP.

If your estate is over 2 million you lose your allowances under a taper system

You just aren’t going to mobilise the masses to campaign for the above to pay less tax.

For some beneficiaries they will be taxed 85% on the funds.

at death, it’ll be calculated and then 40% over the threshold for iht, so if the individual has already exceeded their threshold then their whole fund could be subject to it. For death over 75, Any income then drawn will be taxed as income at the beneficiary’s marginal rate. Pre 75, no further tax will be due. The treatment is the same if they’ve taken any pension or not.

In practical terms, many many pension schemes are not that liquid. This will be the difficult bit to administer as property will need to be sold to release the funds for the iht bill.

the schemes will still have tax efficiencies - contributions relief for employees at marginal income tax rates, no cgt, tax free growth, corporation tax relief to employers for contributions. It may make them less attractive though, or reduce confidence in pensions again.