Inheritance Tax pensions raid 

There has been much publicity about the governments planned inheritance tax pensions raid. This will come into force in 2027.

Although the government claims that less than 10% of estates will have to pay inheritance tax (IHT), with frozen tax thresholds and growing house values, this is only going to increase. Despite the government saying IHT only affects a few people it is disliked by the majority of people. A You Gov survey found that 54% of people wanted the tax to be abolished and 75% said that they thought the 40% tax rate was too high.

The government has admitted that it expects to collect over £600 million from IHT on pensions before 2030. Including the estates of people under 55 who die before they’ve even been able to drawdown any of their pension.

Former pensions minister Baroness Altman is very sceptical about the proposed plans, which she says haven’t been thought through. She has identified a number of potential inheritance tax on pensions pitfalls.

Inheritance Tax problems

According to Baroness Altman:

• The burden of calculating the inheritance tax (IHT) on pensions which is due will fall on Executors. Normally these are not professionals, so there are likely to be mistakes made and executors may be put off from acting. It’s also likely to add costs to the process if specialists have to be brought in to make the IHT calculations.
• The question of who is going to inherit the pension may also arise. The expression of wishes for the pension might contradict the beneficiaries of the Will. This could lead to legal challenges. It could also add cost to the probate process if a legal opinion is needed.
• What will happen if a new pension if found after the IHT has been declared? Lost pension pots are a big issue at the moment.
• The new tax is likely to encourage people to take as much out of their pensions as possible as soon as possible, to avoid the inheritance tax on pensions later down the line. This is unlikely to be in the clients’ best interests. It will also mean people will have less savings as they get older potentially putting more pressure on the state pension.
• The new tax is also unfair and retrospective. It cuts through the long-term retirement planning that millions of families have responsibly put in place.

Altman suggests that inheritance tax on pensions would be better and easier if it was a flat tax rate deducted by the pension provider.

Inheritance concerns

The changes to inheritance tax on pensions are causing real concerns. People worry about what inheritance they will leave for their families. According to Financial Planning Today:

• Over 70% of people think that their family will be financially worse off 12 months after they have passed away.
• 37% don’t think that their partners would last 3 months without struggling.
• 20% often worry about what will happen to their families and over 10% say it a real worry for them.
• 50% of people said that their families would need at least £1000/month after they had died in order to live and 25% said that figure would be £2500/month.
• But only 20% think that their families will continue to use a financial adviser after they’ve inherited their money. Raising concerns about how long any inheritance might last and how much benefit it might bring.

That’s why planning for IHT is so important.

But children are often in the dark about their parents’ finances. According to Charles Stanley over a third of people have no idea what their parents’ inheritance plans are. Worse still over 20% don’t have a Will in place, which will inevitably lead to problems with probate.

Not everyone is concerned, however. A Schroders Wealth survey found that over half of people had no idea about the impending inheritance tax raid on their pensions. That’s despite the fact that a third of people said that were going to pass their pensions on as part of their inheritance plans. They also found that:

• 43% of people did not have an up-to-date plan for retirement, and
• 25% had no plan at all.
• 22% said they didn’t even know how much their pensions were worth.

Probate concerns

As we’ve looked at before. Even when IHT plans have been put in place and Wills arranged, there is always the risk that plans will be contested. Especially if Wills are changed down the line as people get older. Advisers have to vigilant when changing Wills, looking for evidence of undue influence by beneficiaries. In some cases, other structures might be more appropriate like trusts or life interests.

Re-marriage can also be a big issue as previous Wills are revoked on marriage which could lead to the disinheritance of former beneficiaries.

Pension withdrawals on the rise

Concerns over the governments tax plans also led to a 9% increase in the number of people taking their pension for the first time. Up to 960,000 people. In total over £70 billion was withdrawn from pensions, up from £52 billion the year before. Part of this increase was down to fears over taxes on tax free lump sums being introduced. Speculation which is doing the rounds again prior to the November budget.

Get more information.

For more information about inheritance tax on pensions why not contact Christina today. We offer a free initial meeting to discuss your requirements and explain how our service works. You are under no obligation to use us after that if you don’t want to and we won’t pester you.

So why not call us today on 01282 614444 or e mail us enquiries@ccfps.co.uk or use our contact form online.