Inheritance Tax on pension pots

zagfles

Qyburn said:

af1963 said:

Never really understood the logic of a system that can cause a large tax bill for the inheritor of a pension if the original owner survives a single extra day to reach their 75th birthday, which would not have been due if they had died the day before.

Is that how it works, the beneficiary gets taxed immediately they inherit a DC pension? Without ever having looked into it first hand, I had assumed (rashly?) that the beneficiary would only pay tax as they drew from the pension.

You assumed correctly. The beneficiary might be a non taxpayer and so be able to draw down within their personal allowance and so pay no tax. 

Triumph13

Bringing pensions into probate is complicated.  Levying a tax on them on death is simple.  An exemption when left to spouse is easy too.

I expect to be hit with such a tax when I pop my clogs and I think that's entirely reasonable.  As it stands they are a crazily easy IHT dodge.  The question is how much tax.

artyboy

Triumph13 said:

Bringing pensions into probate is complicated.  Levying a tax on them on death is simple.  An exemption when left to spouse is easy too.

I expect to be hit with such a tax when I pop my clogs and I think that's entirely reasonable.  As it stands they are an entirely legitimate and longstanding tax efficient planning tool.  The question is how much tax.

Fixed that for you 

Triumph13

artyboy said:

Triumph13 said:

Bringing pensions into probate is complicated.  Levying a tax on them on death is simple.  An exemption when left to spouse is easy too.

I expect to be hit with such a tax when I pop my clogs and I think that's entirely reasonable.  As it stands they are an entirely legitimate and longstanding tax efficient planning tool.  The question is how much tax.

Fixed that for you 

They were a legitimate and long standing planning tool.  The abolition of the LTA and the hiking of the annual allowance turned them into a gaping hole.

Dazza1902

The tax breaks for saving in a pension are to provide for retirement , it seems odd to allow the transfer of wealth to the next generation tax free. 

zagfles

Triumph13 said:

artyboy said:

Triumph13 said:

Bringing pensions into probate is complicated.  Levying a tax on them on death is simple.  An exemption when left to spouse is easy too.

I expect to be hit with such a tax when I pop my clogs and I think that's entirely reasonable.  As it stands they are an entirely legitimate and longstanding tax efficient planning tool.  The question is how much tax.

Fixed that for you 

They were a legitimate and long standing planning tool.  The abolition of the LTA and the hiking of the annual allowance turned them into a gaping hole.

AIRI the original proposal was that under the new rules pensions couldn't be inherited tax free at all, only lump sums, and the LSDBA limited this to the current LTA level minus tax free cash already taken. Any excess was taxed at the beneficiaries marginal rate. So in some ways this made it worse for beneficiaries. 

But they seemed to relent on this after a few press articles and instead did indeed create a hole where tax free lump sums are still limited by the LSDBA but beneficiaries could use a drawdown pension instead and withdraw unlimited amounts tax free. 

However this is only for death under 75, and there are rules about using a pension to avoid IHT in the case of terminal illness etc, HMRC do look into excessive pension contributions shortly before death. So it's not the gaping hole it's often made out to be. 

LHW99

Also, while many people consider the rule of "tax-free below age 75 death" unfair, perhaps they are only considering death between eg 60 and 75. What of those spouses left with several young children, where the OH passes at a young age (which happens too often)? Surely better they can access what may actually at that time be a moderately small pot tax-free to help them begin to get their lives back together.

leosayer

LHW99 said:

Also, while many people consider the rule of "tax-free below age 75 death" unfair, perhaps they are only considering death between eg 60 and 75. What of those spouses left with several young children, where the OH passes at a young age (which happens too often)? Surely better they can access what may actually at that time be a moderately small pot tax-free to help them begin to get their lives back together.

Indeed. I always saw the "tax-free below age 75 death" as equivalent to a life insurance policy written into trust.

Pension pots are not just there for retirement income although most will be used that way. They have the added benefit of reducing dependence on the state for care fees and for dependents.

If the government want to restrict tax reliefs then reducing the annual allowance is the obvious method but unfortunately the tapered annual allowance and problems around doctors DB pensions currently prevents that.

Albermarle

It is probably worth noting that ideas have been floated as potential half way houses between leaving DC pension pots out of the estate 100%, or in the estate 100%.
One was an extra nil rate band just for pensions, and the anything above that would be counted in.
Or the pot automatically taxed at 20%, even if not withdrawn.
Or 80% of the pot included in the estate rather than 100%
Etc 
I have no idea if any of these might see the light of day, or be practically/legally possible.

af1963

LHW99 said:

Also, while many people consider the rule of "tax-free below age 75 death" unfair, perhaps they are only considering death between eg 60 and 75. What of those spouses left with several young children, where the OH passes at a young age (which happens too often)? Surely better they can access what may actually at that time be a moderately small pot tax-free to help them begin to get their lives back together.

That's what life insurance is for. No need for a general tax exemption for everyone who dies below 75 to cover this.