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Ian Payne 4am - 7am
18 July 2024, 14:58
Calls to bring pensions into the inheritance tax landscape are not new. With any change of government or need to drum up votes, there will be a plethora of suggested tax changes thrown into conversation.
The latest suggestions from the IMF are wide-reaching, covering VAT, inheritance tax, capital gains, and property taxation. But when looking at the numbers, as David Sturrock says, “the impacts now would be modest.”
The possible additional revenue of £200 million is really just a drop in the ocean.
If it’s going to take a “decade or so” to increase receipts to £1 billion - £2 billion, when total receipts for the government in 2023/24 were £1.1 trillion, I’d ask – is this really worth it?
For the clients we work with, a defined contribution (DC) pension is often not held in isolation and forms part of a wider diversified portfolio.
Within this, the pension fund is often not the only investment asset exempt from the 40% inheritance tax charge. The wider estate could contain business assets or a portfolio of AIM-listed investments.
If an individual is using their pension as an inheritance tax planning tool, as suggested by the IMF, then it’s likely their wider level of wealth is substantial, or they have other income sources such as defined benefit pensions or rental income.
These people are likely already meaningfully contributing to tax receipts through income or capital taxes, and not touching the DC pension if it isn’t needed is simply sensible planning.
Conversations we have with individuals are often not started by the view of ‘we need to avoid IHT at all costs’ but are built on how to sensibly and legitimately use tax allowances to structure income.
Drawing income from a DC pension pot (over and above the 25% tax-free amount) would give rise to an income tax charge at an individual’s marginal income tax rate, potentially costing them 40% or 45% when accessed.
We encourage individuals to save into a variety of tax wrappers throughout their working lifetime to provide the flexibility to structure their income in retirement.
To assume pensions aren’t being touched purely for IHT reasons in a large number of cases doesn’t correlate with what we see. The preferential IHT position is often an added benefit rather than the primary driver.
Over the years, there have been many changes to pension legislation, particularly focused on contribution levels, with amounts tapering down for high earners.
This makes building up significant pension values harder for those who can afford to contribute, unlike the much higher annual allowances available for savers in the noughties.
For high earners, we’re comparing the ability to add £200,000+ to a pension in one tax year to just £10,000 now. The impact on future pension values remains to be seen, but I would expect that they trend lower on average as a result.
Having said all of this, there are always ongoing discussions around changes to taxation of various assets and conspiracies as to what will be announced in upcoming budgets.
The key thing is to ensure that people build a financial plan that is flexible and can adapt to inevitable changes in personal situations but also to any legislative changes.
It’s crucial to ask ourselves: are these proposed changes genuinely beneficial, or are they merely political noise?
From where I stand, the latter seems more likely.
Liz Colfer is an adviser and associate director at wealth management firm Five Wealth.
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