Pension investors who wish to hand over pension assets to heirs will be forced to rethink their strategy following draconian proposals outlined in this week’s pre-Budget report (PBR).
Pension companies have been reporting strong growth in “family” self-invested personal pensions (Sipps) as investors set up Sipps with relatives as members so that these assets can be passed between generations.
But financial advisers warned that these plans no longer made sense following the clampdown proposed in this week’s PBR. Under the proposals, spouses and financial dependants will still be able to receive pension fund assets of the over-75s free of inheritance tax. But when these spouses or dependants die, a tax charge of “up to 70 per cent” will apply to the fund. Advisers said that this charge would be levied on top of inheritance tax at 40 per cent, effectively eliminating the attractions of using pension funds to pass wealth between the generations.
The U-turn comes just months after these new pension freedoms were introduced. In April, under the A-day pension reforms, pension investors did not have to purchase an annuity with their pension fund by age 75. By taking out one of the new pension vehicles – known as Alternatively Secured Pensions (ASP) at age 75 – they have instead been able to draw an income directly from their pension with any residual fund passed free of inheritance tax to spouses, civil partners and dependants. Only when these second members died would the fund form part of that individual’s estate for inheritance tax purposes. Now, under this week’s proposals, a further tax charge of up to 70 per cent will apply.
“Quite clearly what the government is attempting to do is tax these schemes out of all existence,” said John Moret, director of sales and marketing at Suffolk Life, a Sipps provider. “They are besotted by annuities, almost flying in the face of some of the Pensions Commission recommendations which talked about a secure income in retirement. The government is translating that into an annuity.”
In a separate paper released this week, the government made a strong case for annuities – which provide a lifelong income in return for the payment of a lump sum, usually a pension fund – as the most suitable way for most people to generate an income in retirement.
The government has also proposed tinkering with the minimum and maximum income withdrawal limits on ASPs. Currently, ASP investors have wide freedoms over how much income they can withdraw from their plans. The maximum limit is set at 70 per cent of a benchmark annuity for a 75-year-old but some investors have been opting to take no income so that this can roll up in their fund instead.
Under the new proposals, the minimum income will be increased to 65 per cent of this benchmark annuity with the maximum raised slightly to 90 per cent. This higher limit will allow investors to suck out more of their fund as income but it also raises the risks that some investors could deplete their pension fund assets before they die.
Hundreds of pension investors who have turned 75 since April have opened ASPs, hoping to pass on their pension wealth. The only way in future that their pension assets will escape tax on death is if they nominate a charity as a beneficiary.
Financial advisers said that people who want to pass pension money to heirs might now be better off buying an annuity and gifting any surplus using “gift from income” rules, which escape inheritance tax.
