The two great certainties of life — death and taxes — suddenly have an unfamiliar element of ambiguity. The vaunted “savings revolution” kicked off with a flourish in this year’s Budget, with savers promised all sorts of freedoms. But the true impact of the policy changes, negative as well as positive, will not be felt for a generation or more — by which time it will be too late for the spendthrifts. While it has taken Britain half a century to decide whether it needs a new airport runway and where to put it, policy decisions that could turn the financial and family lives of every citizen upside down have been introduced almost overnight.
Some of the ethical conundrums to emerge are more suited to a priest than a pensions adviser. They can be seen in the dilemma faced by the family of a wealthy 74-year-old man gathered at his bedside as he lay gravely ill, debating whether to switch off his life support machine. Along with counsel from his medical team, they were seeking financial advice. The reason? Rules introduced in April mean that if you die before your 75th birthday your pension — as long as it is being drawn down gradually rather than locked into an annuity — passes tax-free to beneficiaries. A lifetime of contributions — largely untouched by HM Revenue & Customs, thanks to existing generous pension tax reliefs — are now also immune from inheritance tax if you meet your maker before your three-score years and 15.
For higher earners, who could stand to lose nearly half the value of their pension pot to the taxman if they expire after this date, you could argue that this is a perk worth dying for.
The case in question, albeit extreme, illustrates the growing number of moral quandaries confronting a generation with easier access to pensions wealth — just as their children are increasingly desperate for a bung that could buy them a family home. These baby-boomer benefactors may also be supporting their own elderly parents. Advisers fear they are now vulnerable to abuse.
So, if you were diagnosed with a terminal illness at the age of 74, would you be tempted to head for Switzerland to bequeath your offspring a million or two more? Might your children one day gently ask you to consider this option?
These savers face pressure to give money away while they are still alive. April’s pension changes unshackled those aged 55 and over from having to buy an annuity to give them an income in retirement. More than £5bn of savers’ cash has since been unlocked. There have been repeated warnings of scammers preying on the newly minted and financially naive, offering exotic investments that prove too good to be true.
Eight months on, the evidence from financial professionals is that you can add your nearest and dearest to the list of potential pension predators. Their designs on your cash may not be overtly expressed. But, as a parent in your late fifties, it is hard to ignore the chance to provide your children with a home that could allow them to have a family of their own. The instinct appears so powerful that many end up feathering the chancellor’s nest too; advisers say clients often ignore pleas to consider the tax penalties.
The beneficiaries of this largesse might find themselves returning the favour in decades to come, when they are forced to take on the burden of caring for their elderly parents, their funds now denuded.
Lawyers already report a rise in the number of disputed wills, as siblings, step-parents and second families battle over inheritances. Give your pension away too soon and equity release could be one of your only remaining income options in later life, decimating any legacy you planned on leaving. And if you die within seven years of giving wealth away, your survivors will have to pay tax on your gift (unless they deliberately keep you going on life support).
Lawyers also talk of disgruntled spouses using the new freedoms to indulge in “pensions stripping” ahead of a divorce. Under current regulation, there is no requirement for partners to provide their consent if their other half requests a pension transfer, even though this could deprive them of a survivor’s pension in future. There is nothing to stop them spitefully spending it on a champagne-fuelled holiday in Vegas just so there are no physical assets or cash to argue over in the courts.
For the very wealthy, paradoxically, the new freedoms have provided a significant incentive not to take any money out of their pension at all. They are being advised to run down othersavings first, and view their pensionpot as a tax shelter in the event they are run over by a bus before they reach 75 — or their relatives are forced to take a life-or-death decision.
The writer is the FT’s personal finance editor