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.