Inheritance Tax on pension pots

LHW99

af1963 said:

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.

True, although many people don't realise that until too late. With auto-enrollment, there will at least be that money for those who were on low wages where insurance wasn't a priority, but feeding / clothing children was.

Qyburn

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.

From that point of view something like State Pension age, or the minimum age at which you can draw from a pension at all would make more sense than 75. In fact it would make more sense still if the determining factor was the age of the beneficiary. Why should a young wife with an older husband be treated less favourably than a young wife with a young husband?

Aretnap

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.

The beauty of income tax is that the rate and amount that you pay is dependent on your own financial circumstances. So the struggling widow and young children who inherited a small pot would only pay a small amount of tax anyway - perhaps even zero if they planned for the pension to be split between spouse and children and made efficient use of personal allowances. 

Whereas already wealthy people who inherited large pots would end up paying a larger amount of tax - but still no more than if it was income that they recieved from any other source.

Sterlingtimes

If IHT applies at 40% to a SIPP drawdown (after age 75), the trust disappears, and the SIPP becomes an effective ISA. However, if income tax is applied to the beneficiary after the IHT, then that is far worse.

zagfles

LHW99 said:

af1963 said:

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.

True, although many people don't realise that until too late. With auto-enrollment, there will at least be that money for those who were on low wages where insurance wasn't a priority, but feeding / clothing children was.

Even if all inherited drawdown did become taxable, there's still the LSDBA, which applies on death under 75 and basically means the vast majority of DC pensions could be inherited tax free in their entirety as a lump sum. 

LHW99

Slightly different slant, but I do hope this is a slip by Money Marketing, when they say (my bold):

"(Hayward)...said experts including a leading think-tank economist has urged the government to consider bringing defined benefit pension pots into the remit of IHT, ahead of chancellor Rachel Reeves’ first big fiscal statement in October."

https://www.moneymarketing.co.uk/news/iht-receipts-hit-2-1bn-amid-calls-for-labour-reforms/

I can't quite work out how that could be implemented, given there is no pot in a DB pension, and any inherited income (to spouse / dependents) would be subject to income tax anyway.

Albermarle

zagfles said:

LHW99 said:

af1963 said:

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.

True, although many people don't realise that until too late. With auto-enrollment, there will at least be that money for those who were on low wages where insurance wasn't a priority, but feeding / clothing children was.

Even if all inherited drawdown did become taxable, there's still the LSDBA, which applies on death under 75 and basically means the vast majority of DC pensions could be inherited tax free in their entirety as a lump sum. 

Do you mean that more than 25% of the inherited pot could be taken tax free ( assuming it was within the Lump sum limit) even after the possible changes to drawdown tax ?

zagfles

LHW99 said:

Slightly different slant, but I do hope this is a slip by Money Marketing, when they say (my bold):

"(Hayward)...said experts including a leading think-tank economist has urged the government to consider bringing defined benefit pension pots into the remit of IHT, ahead of chancellor Rachel Reeves’ first big fiscal statement in October."

https://www.moneymarketing.co.uk/news/iht-receipts-hit-2-1bn-amid-calls-for-labour-reforms/

I can't quite work out how that could be implemented, given there is no pot in a DB pension, and any inherited income (to spouse / dependents) would be subject to income tax anyway.

That makes zero sense, suspect it's a typo and they meant DC pots not DB. DB dependant pensions are usually only for spouse/children and are already subject to income tax, IHT on them makes no sense as a spouse is already exempt from IHT and children's pensions only last while they are children or finish FTE at the latest usually. 

zagfles

Albermarle said:

zagfles said:

LHW99 said:

af1963 said:

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.

True, although many people don't realise that until too late. With auto-enrollment, there will at least be that money for those who were on low wages where insurance wasn't a priority, but feeding / clothing children was.

Even if all inherited drawdown did become taxable, there's still the LSDBA, which applies on death under 75 and basically means the vast majority of DC pensions could be inherited tax free in their entirety as a lump sum. 

Do you mean that more than 25% of the inherited pot could be taken tax free ( assuming it was within the Lump sum limit) even after the possible changes to drawdown tax ?

Yes. See Tax-free lump sum allowances for pensions | MoneyHelper 

They could of course abolish the LSDBA or more sensibly reduce it to the same as the LSA, ie 25% of the old LTA about £268k