This is an interesting viewpoint. Tomorrow I’ll be speaking to a group of people for whom pensions has nothing to do with inheritance tax and everything to do with replacement rates or as my colleague Terry Pullinger calls a pension – deferred pay and a wage in retirement.
The FT’s Alan Livesy speaks for the people for whom a pension might give people a “comfortable retirement”. A recent report suggests people need £750,000 to give an income of £45,000 yet those who have that extravagant amount of pension pot are the kind of people who don’t need it, for whom the pot is a legacy for the next generation.
Here he brilliantly explains what has happened to those with a wealth problem.
The November 2024 Budget brought pensions back within the scope of IHT. Pensions had previously fallen within the scope of this levy before former chancellor George Osborne introduced an exemption in 2015, creating a tax loophole through which those with means have jumped with both feet.
This is a quite different take on the pension IHT reformation that we will get in April 2027. As Alan puts it
Just pouring money into a pension and then leaving it will no longer work if you want to maximise your legacy.
I’m pretty sure this is the kind of policy that this Government expects to restore pensions to being pensions paying us retirement income.
This is the verdict of wealth managers
“The biggest issue with pensions is that the tax rate will be high for anyone’s inheritance,” says Rachel Vahey at AJ Bell.
If a person dies after 75, then beneficiaries need to pay income tax at their normal rate after IHT has been deducted.
For every £100 of pension, she calculates, IHT could eat up £40, but income tax on what’s left could swallow £67 altogether.
She is right of course the biggest pensions issue for people who don’t need pension income but the biggest pension issue for the Pensions Commission is lack of income.
There is a similar issue in public schools who are suffering a new tax (VAT) which is seeing those barely affording the cost of private education to return kids to the public sector. The argument among wealthy parents is that this is the biggest issue in education.
How has the wealth manager’s advice shifted i?
“In the past, the rule of leaving everything in your pension applied. But not any more,”
IHT is not the greatest issue in pensions. It is the greatest pension issue for the wealthy who have now to rethink tax avoidance, or more properly “a taxation strategy” that allows the rich to meet inheritance tax comfortably.