There are now four ways of avoiding inheritance tax with your pension pot (s) you’ve saved over your work career
- If you are within a year of joining a public service* pension you can swap your pot for pension based on actuarial conversion rates. Once the money is swapped for pension , it is not going to give rise to inheritance tax either before you become a pensioner or when you or your spouse are the pensioner *you may get an extension in time taken at the scheme’s discretion
- If you choose to, you can swap your pot for an annuity and not pay inheritance tax on your annuity when you or your spouse die. You can do this before, at or after retiring on your pot.
- If you find yourself in a CDC scheme , you can swap the pot for CDC pension as long as you aren’t at retirement. From 2029 you can do the swap at retirement and maybe beyond that date if the retirement date is flexible (details to follow from DWP)
- Finally , you won’t be liable to inheritance tax if you are in a private or public defined pension scheme or from the state pension.
In short, if you are in pension, you are not liable to inheritance tax on the pension. You can pay tax from “tax-free” cash which may end up taxed if unspent and you may pay inheritance tax on your pension pot if you don’t spend it. But to be being boring by repeating – you won’t get taxed on the pension.
These extremely bright and pension savvy people, will bear me out on this because they know about pensions.
Strangely, in this article in Professional Pensions, no mention is made of the simplicity to administrators if members of pension schemes choose whichever of the above applies to these personal circumstances.
I hope that pension people are getting the message. Government think that “an income for retirement is something more useful” as this post from the new Director of Pensions explains.
I hope that in the not too distant future, people will start recognising Defined Benefit pension , Collective (CDC) Pension , Transfers into public state pension and the use of annuities as “something more useful” and better taxed (for the high net worth saver for a pension).
I don’t think that enough is being made of the taxation exemption that pension income enjoys compared to pension pots. If you are going to leave an inheritance bill to pay on your pension pot, you may think about one of the four options.
If you are in a DB pension, it is a good idea , if possible , to stay in it
If you are wanting security over income , then a guarantee may be your home for some or all of your pot.
If you prefer to have better income but with some volatility of your income (above and below income) then if you can get into CDC, you may try it.
Finally, if you are moving into a new DB scheme that’s sponsored by a public sector sponsor (including the LGPS) then you should think about transferring into this pension.
I dare say you can afford to take advice if you have an inheritance tax adviser, but if you haven’t, the web is very useful place to find out more.
I dare say your trustees and administrators will be able to help you and it sounds from this article as if employers are interested in looking after their richer employees!
A moral society generally encourages thrift, self-reliance, and personal responsibility to prevent individuals from becoming a burden on public resources.
Because longevity and late-life health costs (such as care fees) are inherently uncertain, maintaining a pension buffer in old age is a basic act of caution.
Levying punitive combined tax rates on unspent funds moralises against prudence, effectively rewarding those who exhaust their capital while penalising those who prepared for the worst.
We are in a situation when not enough is contributed to pensions so removing it for the benefit of the Treasury and creating an unworkable PR regime seems to be another own goal propping up a failed system .
Breach of the Social Contract?
Pensions are fundamentally multi-decade commitments. Individuals chose to lock away their earned income for 30, 40, or 50 years under explicit statutory incentives and rules set by Parliament.
Changing the terminal tax status after funds have been irreversibly committed breaches legitimate expectations. It undermines trust in public institutions, penalising citizens who acted prudently according to the law in place when they made those sacrifices.
They are already taxed on withdrawal which was understood and in the initial draft legislation this acknowledged with a credit and the l second level of tax added. The introduction of a new IHT reporting document IHT 430 probably went unnoticed but is clearly aimed at the definition of “normal expenditure ”
The options for anyone who has built up a substantial personal pension are unattractive. If ,having exhausted your tax free allowance, and bought an annuity, you still have substantial fund left there are only three options: buy more annuity the income from which will be taxed at higher rates if it takes you into the death zone; draw more income from the remaining fund ditto; hang on and pay inheritance tax.
I agree, there is no obvious opportunity right now to convert a personal pension pot into a pension. Let’s hope that someone in Government is thinking about this.
The headline reminded me of the wise words of a hang-glider instructor many years ago when I used to fly such flimsy craft.
“Flying hang-gliders, despite what you are told, is not dangerous. No-one was ever injured from flying.
Take care not to hit the ground though, that can sting a bit”