Jo Cumbo in an excellent article charts the complexity to the rich of having money as “pension wealth”. The furore over IHT over pension “wealth” is a belief that for the rich, pensions were “EEE”, not “EET” as they are for the pensioner.
I am not sure what there is to “warn” about! For many wealthy people, the money in pension wealth has been stored to pass on to the next generation not only without tax to pay on its growth but a prospect it can pass to the family without tax. For middling “wealthies” it can avoid the next generation paying inheritance tax and for the full on “wealthies” it can be the liquid savings that can pay some or all of the pension bills.
The government estimates that in 2027-28, an additional 10,500 estates will face IHT after the change, and 38,500 will pay more — adding an average of £34,000 to liabilities.
All this was ever so nicely planned to be avoided by financial advisers working
on the basis that no Government would dare annoy the wealthy. So long as we had a Conservative (effectively from 2010-24) then all was well but it took only a few months of a Government with different priorities, for this subsidy from the less “wealthy” to the “wealthies” to be reversed.
The Government made it clear that money saved into a pension pot needed to be returned to circulation in the economy and made the hoarding or pension wealth in pots a flirtation with inheritance tax. Of course “wealthies” tend to live longer, because they live healthier , their work is less onerous and because they can afford to live in areas which make long lives easier. If they had the confidence that demographics tell them, they might take a chance on keeping pensions in wealth pots, as insurance against living too long. They might even swap their pots for pensions – either by buying an annuity or waiting for developments in CDC which are tipped (by actuaries and Government alike) to pay pensions of up to 60% more.
But Jo’s brilliant article explains how advisers have found ways to use loopholes in the legislation that allow money to be passed between generations.
Advisers and pension providers report a surge in access requests from clients with larger-than-average defined contribution pots. That’s not good for advisers who are rewarded from the pots , typically by annual management charges on the fund (though some do charge flat fees). The IHT hit is a hit to assets under management within Self Invested Personal Pensions and other wealth management tools not really designed to pay “pensions” (a regular real income designed to insure against living too long).
“The new rules have forced many people saving for retirement to rethink their plans and deal with a tax they never expected when they started putting money into their pension.”
says Rachel Vahey of AJ Bell to Jo Cumbo.
This is total cobblers.
The deal between the taxpayer and HMRC is that pensions are EET. That means exempt on contributions (which get full tax relief) , exempt on growth (on capital gains and reinvested income) but taxed on what comes out (except for a quarter of the pot which is treated as tax-free.
There is a generation of clients and of advisers who actually believe that for the rich , pensions (using freedom from pensions) can be EEE. This was never the idea and is most unfair, it gives a tax break to the “wealthies” for whom pensions are the cream on top.
Of course there are ways that money can be passed from pots to those in need and this seems a perfectly good way of spending pensions where there is need
but Jo is wise to this loophole being abused
In short, there is an opportunity for wealth managers and lawyers to become wealth protectors, a new kind of pension manager whose job is to find ways for EEE to be maintained.
Meanwhile, the Government, through HMRC, could be on the look-out for tax evasion rather than tax-avoidance and that would mean leaving the next generation with a different problem.
I think it is time that we levelled the nation up and that we all had pensions that met needs. That means that those who enter into a contract with HMRC where pensions are taxed, accept that the price of exemptions later on , is tax on pensions. The wealthies do not need to pay national insurance on income from pensions and I can think of many things people can do with pension income (whether from a pension or an annuity).
Right now, the “wealthies” are living in a tax paradise of EEE which they were advised was theirs so long as their self invested pots were maintained. We are now less than a year from the paradise having a tax man or woman at the gate, demanding an exit fee for “wealthies” known as “tax” – the T in EET.
It is not just the tax exemptions of the rich that are threatened, it is the income of wealth managers. Both clients and advisers need new ways to avoid (not evade) HMRC – the alternative is to pay tax like everybody else.
It is truly heartening to see such a dedicated effort to rebrand basic financial foresight as a “loophole.” The article’s suggestion that successfully managing one’s deferred salary is a moral failing is a masterclass in the politics of envy. Clearly, the responsible act of ensuring one doesn’t become a ward of the state in old age is an egregious display of “greed” that must be corrected by those who find arithmetic offensive.
The disdain for professional advisers is particularly touching. Why consult an expert to navigate a labyrinthine tax system when one could simply rely on “guidance”—that delightful realm where accountability goes to die? It is much more egalitarian to ensure everyone arrives at retirement equally unprepared, rather than allowing the “unfair advantage” of actually honoring the employment contracts that deferred this pay in the first place.
One must admire the bravery it takes to argue that a fund, built from taxed earnings and intended to provide independence, is somehow a gift from the public purse. Perhaps the author believes the “reality of the marketplace” is merely a polite suggestion. In a world where self-reliance is viewed as a systemic glitch, we should all apologize for the audacity of planning.
incIdentally fiscal drag will soon erode the 25% tax free “loophole” the amount is capped at an arbitrary number.
Correction “from taxed earnings” should have been
“from differed earnings”
The tax payer would see the abuse of pensions a different way if they new who was getting what tax-perks John! Later this year, non tax-payers who were promised incentives for saving , but who were denied it by the Net Pay tax system will get a little of their rightful incentive back in their bank accounts. The system is weighted towards high earners who get all the breaks, that is not right in my book!
If you start by accepting that taking government promises at their word is abuse then the conformational bias needs no more assistance from objectivity
You might have gathered at as an ex adviser I do see the adviser as a superior being to those hiding ignorance under the cloak of guidance. We are well past the Allied Crowbar training which worked just as well for selling fish in Oxford Street but that was finally killed off by 1988 but still is used as a stick to beat the adviser today.
A quick checklist once a pension has been defined as desirable for the individual might look like :
Pension Fundamentals:
Fact Sheet
1. Annual Allowance (AA)
• Standard Allowance: £60,000 per tax year.
• Scope: Includes contributions from the individual, employer, and third parties.
• Tapered Annual Allowance: High earners may see their allowance reduced to as low as £10,000, depending on earnings.
• Money Purchase Annual Allowance (MPAA): Triggered by flexibly accessing pension benefits; limits contributions to £10,000 (no carry forward allowed).
• Carry Forward: Unused allowances from the three previous tax years can be used if the current year’s limit is exceeded.
• Annual Allowance Charge: Excess contributions (after carry forward) are added to taxable income and taxed at the individual’s marginal rate.
2. Tax Relief on Personal Contributions
• Earnings Limit: Relief is limited to 100% of relevant UK earnings (employment/self-employment).
• Note: Interest, dividends, and rental income do not count.
• Note: You cannot carry forward unused earnings from previous years.
• Low Earners: If earnings are below £3,600, individuals can still contribute up to £3,600 gross and receive tax relief.
• Methods of Relief:
• Relief at Source (RAS): (e.g., Personal Pensions). Contributions are paid net of 20% tax. The provider reclaims the basic rate from HMRC. Higher/additional rate taxpayers must claim extra relief via their tax return by extending their basic rate band.
• Net Pay Scheme: (e.g., Occupational Pensions). Contributions are taken from gross pay before tax. Full relief is immediate. (NI is still charged on the full amount).
3. Salary Sacrifice
• Mechanism: Employee reduces salary in exchange for an employer pension contribution.
• Benefits: Saves National Insurance (NI) for both employer and employee.
• Upcoming Change: From 6 April 2029, the NI benefit will be capped at contributions of £2,000 per year.
4. Tax Relief on Employer Contributions
• Payment: Always paid gross.
• Earnings Link: Not restricted by the employee’s earnings (e.g., a £10k earner can receive a £60k employer contribution).
• Corporation Tax: Deductible for the employer if they meet the “wholly and exclusively” rule (must be a genuine business expense).
• Efficiency: Highly effective for owner-managed businesses to extract profits, provided the contribution is commercially justifiable.
5. Strategic Planning Checklist
• [ ] Utilize Carry Forward: Check for unused 2023/24 allowances before 5 April 2027, or they will be lost.
• [ ] Monitor MPAA: If triggered mid-year, consider a one-off contribution to maximize the £10,000 limit before year-end.
• [ ] Reclaim Personal Allowance: If income is between £100,000 and £125,140, pension contributions can “claw back” the personal allowance, creating an effective tax saving of ~60%.
• [ ] Protect Child Benefit: Reduce “adjusted net income” to below £60,000 to avoid the High Income Child Benefit Charge.
• [ ] Family Gifting: Consider contributing £2,880 net (£3,600 gross) for non-earning family members or children to secure the £720 government “top-up.”
The tone of this article seems a touch hysterical and overly political…
Financial advisers, and savers, simply operate within the rules that exist. When it became possible for DC pension pots to be inherited tax-efficiently, advisers and savers rationally responded to that incentive. Now that the rules are changing, they’re rationally adjusting behaviour again, as they’ll do so in future again. Moralistic characterising of this rational behaviour is myopic, misplaced and probably reveals more about the commentator than it does about the subjects.
Really, politicians need to learn not to keep moving the goalposts like this. What’s required is long term stability in these frameworks so savers we can make decisions safe in the knowledge the rug won’t be pulled from beneath them at the whim of a succession of politicians each wishing to “stamp their mark” before soon disappearing…
What we really need to do is to keep the system favouring the wealthy. It makes things much more predictable (it was a principal established in feudal days, or perhaps in the Roman days of slavery!)
Pretty silly reply, revealing more of the commentator’s biases than the subject at hand…
The constant moving of goalposts and changing of rules act as THE major disincentive for people making long term retirement provision.
The 2027 estate inclusion for unspent DC pots does not affect me at all, so I have no personal “dog in this race” and no agenda other than as someone fed up of witnessing the damage arising from constant fiddling to suit the agenda of the government of the day. Every successive government is guilty of this, and the nation and savers pay the price.
Above all else – and we hear this constantly – savers desire stability in policy so they feel comfortable locking money away for multiple decades, but Ministers really couldn’t care less.
From an NI perspective, pensions have been EEE since smart-arsed advisers discovered salary sacrifice. I’m personally delighted that they will soon become TEE for all but the least wealthy. Although I’d rather they were EET from the NI side of things to match the Income tax side.