Rishi Sunak has been urged to launch a £1bn raid on inheritances as wealthy families increasingly use pensions to avoid the tax.
The Institute for Fiscal Studies said pensions risk becoming “a vehicle for the wealthiest households” to slash their inheritance tax bill as they use other investments to provide income in retirement.
The think tank said a rich couple can escape tax bills of more than £600,000 through the pensions loophole, urging for it to be “swiftly ended”.
Any money remaining in a pension at death at any age is not subject to inheritance tax, creating a huge incentive to use other investments to fund retirement and leaving pension pots for families. There is income tax on money received from inherited pension pots but only if they died at or after 75.
The thing is, we’re repeatedly told that the dead don’t actually pay inheritance tax. So, it’s fair game. Also, there can’t be any distortions from taxing inheritances because there are no incentives.
Except, as we can see, people go to extraordinary lengths to avoid inheritance tax. So, there are distortions, people do feel the pain.
Exactly because people do these things we know that inheritance tax does have an effect upon behaviour.
Translation: Some people see somebody else might have enough money to make people jealous, and think the state should have that money instead.
“and think they should have that money instead.”
Perhaps we should restrict all taxpayer funded pensions to a maximum of twice the state minimum pension and only payable from state pension age.
That would have a rapidly beneficial effect on budgets.
I find it bitterly depressing that even allegedly right-wing newspapers seem incapable of arguing for the dramatic cuts in public spending which are needed.
I do find it depressing that this government and all political parties have managed to ignore demographics and energy security for several decades while ploughing billions into the net zero scam and follies like HS2
All of this has been predicted for decades, previous raids on pensions (thank you Mr Brown) has had a massively destructive effect already
I’m confused. How can you have money left in a pension at death? I Thought the whole point was that pensions are a gamble/insurance (depending on your pov) on when you will die. The money paid in but not paid out by people who die early being forfeited, and covering the pension company’s losses on paying out pensions to those who are still going strong in their 90s.
What am I missing?
BitFR,
They’re referring to Self Invested Personal Pensions, SIPPs.
BitFR
In a SIPP you used to be forced to buy an annuity at or before age 75. But annuity rates were so shit that they basically guaranteed that you would get less out in cash terms than you paid for the annuity unless you lived to 110 or something ridiculous. So the rules were changed so that you could leave your pension invested and draw both capital and derived income as required. Given the amounts that people had saved in order to buy the over-priced annuity that they were forced to buy, many had way more capital than they needed if they could live of 4-5% dividends instead, thus the capital stays there, and quite possibly even grows.
The exact details are somewhat hazy, but under certain circumstances your pension turns into a trust at which point it is not actually yours even if you are the beneficiary, so it is taxed like a trust. Which includes not being part of your estate when you die (because it isn’t yours). The thing is, if your heirs take any money out of the trust then they are liable for income tax at their marginal rate when they take it out: this is obviously not true of money that is inherited.
There is/has been until recently a rule that allows the recipients of a SIPP to transfer the proceeds into their own pension without affecting their £40k per annum deposit limit or their lifetime allowance, so if it goes into their pension they get full tax relief on the tax that they pay for taking the money out of the trust. The thing is that then they are liable for income tax when they take money out of the pension that they’ve paid it into.
The effect of treating capital in a trust as an inheritance is to move the tax liability forward in time, and quite possibly to a higher rate, not to create a tax liability where there wasn’t one before.
So the supposed problem is created by taxing different asset classes differently and a “conservative” government is astonished at the existence of perverse incentives.
I’d like at least the option for an income tax form with two boxes on it, namely “income”, and “tax already paid on said income”.
I’d also like to see the inheritance tax rate be something you can choose, on condition that the lower inheritance tax band you pick the higher your income tax while alive.
This could be part of a package of mandatory choices school leavers have to sign up to. “I want the state to take care of my every need”, cool, you get to choose that. And pay 75% income tax. “I’ll sort me own investments, health insurance and so, just keep the streets safe and the beaches defended against colonialists, and I get to withhold some of the payments if you can’t even do that”, cool you get to choose that, and pay 20% income tax.
What’s not to like?
Why can’t a Conservative
Be more like a man?
They are considering a way of taking more IHT from the prosperous middle classes. I suggest instead that if they want more IHT revenue raised punitively they target the actual rich by putting a cap on Business Property Relief and Agricultural Property relief.
Or if they simply wanted more IHT revenue in total they should cut the IHT rate to 10% and scrap all the reliefs except for (say) the the relief for widows/widowers and a Nil Rate Band of (say) £100,000.
What pension? Between the Annual Allowance and the Lifetime Allowance, there’s sod-all left. That’s if you can even afford to contribute to the bloody thing in the first place, given the cost of living.
If he wants the possibility of a general election win then he needs to be cutting taxes, not just talking about cutting taxes. And to the ordinary voter of almost all political flavours inheritance tax is about the worst of all evils!
Jeremy Hunt banging on about “you have never had it so bad” is not going to keep Starmerer out of No 10.
I can’t see why any young person would want to invest in a pension now, even if they had the income to do so – there seems to be absolutely no certainty about what exactly it is you’re paying into, and what you’ll eventually be able to get out of it. I know people’s confidence in pensions took a hit with Equitable anyway, but aside from the issue of trust in the private sector to look after your money, you’d have to be mad to have any trust in politicians to look after the rules governing the thing. That’s even on a 10-20 year basis, someone saving up now for money they only expect to get back in 50 years’ time must be genuinely clueless (no matter how well-informed they are about the current rules and even political trends) what will be in effect by that time.
@Anon: I’d say much the same about anyone considering entering the BTL biz. So how should young people save for their old age?
If I were young and were offered a pension of “you pay up to 5% and I (the employer) will pay double” I’d be tempted to risk it, especially on any pay vulnerable to higher rate tax (or yet higher). If my tax relief were 20% and the employer offered 3% to my 5% I’d hesitate. Then hesitate again. Might I do better to try to put the money into owner-occupied housing?
Haven’t we (as in the state, the media, anybody who can add up numbers) spent the last umpty-ump decades *SCREAMING* at people to provide for their own old age, and now those that did so, trying to tell them yes, we doing it, shut the **** up, are going to be punished for it.
Anon
One of the most annoying things about the future is it’s unknowable.
Don’t worry about how to create a pension; it’s also uncertain you’ll keep your job, not be run over in a tragic accident, get divorced and lose everything, or even be alive at pensionable age.
One thing you can be fairly confident about tho is that if you do reach pensionable age and have not put money aside for a pension, you will have only what the state deigns to give you.
Which won’t be much
IHT rules are appalling
I had to complete >140 pages of HMRC forms in order to satisfy them that NIL inheritance tax was duee when my late mother-in-law died.
There may be a case for eliminating tax loopholes (if pensions are tax-free during accumulation then they should be taxable when drawn down).
It is NOT TRUE that pension funds are tax-exempt at any age – just that those who die after the pension vests (usually at 65) before reaching 75 can pass on what’s left to a direct desendant exempt from IHT, which is comparable an owner-occupied houes (up to £xm) or anything left to a spouse. What is left in my pension fund will go tomy elder son but he will have to pay income tax on it.
N.B. Any lump sum from a DB scheme gets paid to a nominated beneficiary exempt from IHT. To make the left-over balance from a DC scheme in drawdown liable to tax you would need to change the law covering this.
BiFR,
Further to Matt’s explanation, our IFA advised us to use up our ISA allowances every year before adding to our pension pots. It’s amazing how much built up in those over the past 25+ years. We’re now living comfortably off draw-down from those plus our State pensions, her small teachers pension and what she still earns as a self-employed artist.
We haven’t touched our SIPPs yet and we’ve no intention of buying annuities.
I’m not suggesting “the future is unknowable, so don’t save for the future” is a sensible idea, and if an employer is basically shoving free cash at you, there’s a decent incentive to take it up. But “of all the ways to make sure you do to keep yourself from penury in old age” – and that’s definitely worth doing, since failing to do so will, sod the unknowability, almost certainly leave you up the creek without a paddle in your old age – “I’m not feeling so keen on sticking the cash into something whose rules and outcomes are highly uncertain and I can’t easily get it out of” would not be an irrational response to the current incentives.
@john: are you sure?
“those who die after the pension vests (usually at 65) before reaching 75 can pass on what’s left to a direct descendant exempt from IHT” My understanding is (i) it applies whether the pension has vested or not, (ii) it needn’t be a direct descendant, (iii) if you do die before 75 the beneficiary can draw out without paying income tax on it, (iv) it’s free of IHT whether you died before or after 75.
“What is left in my pension fund will go to my elder son but he will have to pay income tax on it.” There’s a case for nominating a grandchild or great-grandchild if that would mean they could use their Personal Allowance to draw money out after age 18 without paying income tax. Assuming there is such a Young Person to hand.
Anon
Coupled to the inherent unknowability of the future, the prospective survivor also has to deal with incompetent, grasping, unethical pressure-group driven governments.
So yes indeed, the situation is dire.
Oh well, no change there then
@BIT
As with BIND, I find the ISA a very attractive alternative to pensions because at least the money is still “mine” to do what I please with, and I trust myself not to touch it without good cause (for many people this, rather than tax, is probably the best argument for a pension – if you can’t touch it, you won’t waste it!). Like BIND I’ve built up a lot over the years. Of course a future government could hit ISAs with a tax change – wouldn’t surprise me at all if a lifetime limit came in for them. But I like knowing that, should they become sufficiently unattractive, I can liquidate my investments, take the cash out and use it for whatever purpose seems like a better idea at the time. With the pension it’s much harder.