My son will inherit my £135k pension pot – but the provider says he must take it as a lump sum: How can we avoid 40% tax hit? @stevewebb1 replies https://t.co/iy3AyUTCFa
— This is Money (@thisismoney) May 30, 2023
My answer
My obvious answer to this question is for the 74 year old asking this question to buy himself and possibly his partner, an annuity , so his son can be spared a tax bill of £54,000.
This would substantially enhance the lifestyle of the 74 year old or he could choose to pass the annual income from the annuity to his son as a series of gifts (I suspect classed as out of normal expenditure).
Steve Webb’s answer
Poor old Steve Webb, is landed with these “rich people’s problems” week after week. In this case he has had to haul in an old colleague from his Royal London days to get the answer and his answer is that the stakeholder pension his interrogator owns, is clapped out and cannot provide inheritable drawdown. It could and should be exchanged for a more up to date model and if there is an IGC or GAA in place at his provider, he should be asking them just why he’s stuck in this plan. At least it is a stakeholder pension , so it should be transferrable – though all personal pensions can be traded in for new ones at minimal cost – provided the policyholder is over 55.
But even if the money comes packaged in a new more flexible policy, it still come to the next generation with attendant problems. To put it in a nutshell, the money has to be spent sometime even if the prospect of wealth cascading down generations seems attractive.
Maybe there will come a time when the son and heir becomes sufficiently impecunious that he will be able to drawdown at a lower marginal tax-rate, but is this something to be hoped for?
The inheritable pension
It is a grim irony that while we theorise about pension inadequacy
Aon UK DC pension tracker falls
……there is an excess of pension wealth amongst the mass-affluent that can pre-occupy “This is Money” readers with arcane issues such as this one.
It is not for me to say that my generation and our remaining parents should not be concerned about inheritable wealth, but is the pension taxation system really supposed to be encouraging conversations such as this.
Is it any coincidence that this gentleman is considering this matter at the age of 74 as he approaches the tax cliff-edge of 75 when many of the IHT privileges accorded to personal pension inheritance, fall away?
The tax rules surrounding the inheritance of pension pots (and not pensions themselves) encourage the deferral of spending of pension wealth to the detriment of the real economy that could do with some of this tax-privileged money back in taxable circulation.
And so long as there is an incentive for people not to spend, pension providers will be disincentivised from innovating so that we get pensions from our pots.
As I have written elsewhere today, the private pension system is a rich man’s game (gender bias intended).
I hope that the next Government will look long and hard at the inheritance privileges accorded pension pots. They are encouraging wealth preservation and discouraging insurance against old age. They are creating an obstacle to innovation , and driving many older people to unnecessary frugality.
I suspect that Steve Webb will have some sympathy for this view.
