Inheritance tax on pension funds

LHW99

Pat38493 said:

LHW99 said:

Probably the key rational argument behind any changes ( if there are any)  is that pensions are encouraged by the Govt through tax benefits, so you can have a nice pension/retirement and be spending money and not asking for handouts when retired. A pension ( bolstered by Govt tax benefits ) should not be a  way of passing on family wealth tax free.

And of course, no one knows their personal life expectancy. We are encouraged to make sure we have enough to support our lifestyle (be that basic, moderate or luxury), which is very likely to mean that hopefully few people will outlive their pot income, and currently know that what's left if any remains to pass on..

If IHT (or another) is levied at a significant rate on residual money, I suspect people will start looking for ways to avoid money being left in the pot, possibly by not putting as much into pensions, and risking the consequences.

What proportion of people contribute to their pension with the sole intention of bypassing inheritance tax today?  I doubt it’s a significant proportion of people.  

It does seem from these boards that more people (than should perhaps) worry about inheritance tax, than actually take much interest in their pension until it's (almost) too late.

If the headline is "pensions to be subject to inheritance tax", then quite possibly that will have more effect on pension saving behaviour than the "will you have enough" / "pension income requirements" articles appear to have.

Albermarle

LHW99 said:

Probably the key rational argument behind any changes ( if there are any)  is that pensions are encouraged by the Govt through tax benefits, so you can have a nice pension/retirement and be spending money and not asking for handouts when retired. A pension ( bolstered by Govt tax benefits ) should not be a  way of passing on family wealth tax free.

And of course, no one knows their personal life expectancy. We are encouraged to make sure we have enough to support our lifestyle (be that basic, moderate or luxury), which is very likely to mean that hopefully few people will outlive their pot income, and currently know that what's left if any remains to pass on..

If IHT (or another) is levied at a significant rate on residual money, I suspect people will start looking for ways to avoid money being left in the pot, possibly by not putting as much into pensions, and risking the consequences.

It is a good point, and difficult to find the right balance. It would point to maybe the first £xxxK being free of IHT and the rest not. How that could be done without too many complications I am not sure.

Albermarle

The IFS have been making noises again about what tax changes they think should be in the budget, taking account the Chancellors hands appear tied on the four main taxes .

I quote from a Guardian article on the points most relevant to this thread/forum.

Changes to inheritance tax, which is on course to raise £7.5bn in this financial year, could increase the Treasury’s firepower, it said. “A good start would be ending, or at least capping, the unjustified exemptions for pension wealth, business assets and agricultural land – a change that would raise around £2bn a year assuming no behavioural response,” it added.

“But Rachel Reeves also has the power to fix some of the more glaring deficiencies of our tax system: taxes on pensions, capital gains and inheritances – to name just three – are all crying out for reform.

In a similar DT article, the IFS also says that pension tax relief should not be meddled with.

zagfles

Albermarle said:

The IFS have been making noises again about what tax changes they think should be in the budget, taking account the Chancellors hands appear tied on the four main taxes .

I quote from a Guardian article on the points most relevant to this thread/forum.

Changes to inheritance tax, which is on course to raise £7.5bn in this financial year, could increase the Treasury’s firepower, it said. “A good start would be ending, or at least capping, the unjustified exemptions for pension wealth, business assets and agricultural land – a change that would raise around £2bn a year assuming no behavioural response,” it added.

“But Rachel Reeves also has the power to fix some of the more glaring deficiencies of our tax system: taxes on pensions, capital gains and inheritances – to name just three – are all crying out for reform.

In a similar DT article, the IFS also says that pension tax relief should not be meddled with.

The original plan for the LTA abolition seemed to include a plan to stop inherited tax free drawdown, but I think that was dropped because it would have affected people nowhere near the LTA and was probably considered too controversial to include that in LTA abolition legislation. So they could implement that and follow a long tradition of govts stealing previous govts ideas 

Grumpy_chap

Albermarle said:

raise around £2bn a year assuming no behavioural response,” 

And therein lies the rub.
Change the rules and individuals react.  
Evidence for this is the measures individuals take to avoid the 62% (more depending on location within UK) marginal tax rate associated with withdrawal of the personal allowance (plus child care).  
A big simplification of the whole tax system could well avoid many of these illogical measures.

zagfles

Grumpy_chap said:

Albermarle said:

raise around £2bn a year assuming no behavioural response,” 

And therein lies the rub.
Change the rules and individuals react.  
Evidence for this is the measures individuals take to avoid the 62% (more depending on location within UK) marginal tax rate associated with withdrawal of the personal allowance (plus child care).  
A big simplification of the whole tax system could well avoid many of these illogical measures.

Expect the opposite. That what comes of making pointless promises like not raising income tax rates. They raise effective income tax rates through stuff like allowance withdrawal. 

How about basic rate band withdrawal for incomes above £125k, then maybe higher rate band withdrawal.