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At a time when many are enduring continuing austerity and wage stagnation now does not exactly seem the time for the UK government to be giving tax cuts to the wealthy and well advised.
Yet today the chancellor has abolished 55% tax that had applied to untouched “defined contribution” pension pots left by those aged 75 or over, and to pensions from which money has already been withdrawn.
Make no mistake about it, no matter how this is dressed up, this announcement represents a considerable inheritance tax cut for the wealthy and well advised of this country.
The trouble is that pensions are complicated. Whilst this bemuses the majority of the population it means that the wealthy and well advised can exploit every wrinkle and loophole to maximise the financial benefit to themselves.
Currently one can build up a pension pot of up to £1.5 million. That’s a level which is 100 times the size of the annual ISA allowance so it’s already quite a significant value. However unlike ISAs using a bit of planning and timing a higher rate taxpayer can achieve a pension value of £1.5 million through a net cost of only £900,000 thanks to higher rate pension tax relief.
The trouble for the tax authorities is that the way pensions are designed means that on death the value of a pension pot can pass to dependants bypassing estates for inheritance tax purposes.
Clearly for the wealthy and well advised that’s quite a loophole: build up your pension pot and on death you’ve pushed up to £1.5 million outside of your estate and away from any inheritance tax charge. That’s why until now the government put in place a special one-off tax charge of 55% for pension pots for anyone dying after the age of 75 or any funds where the pensioner had already drawn down funds.
That might seem draconian tax charge but it’s not; all it’s doing is reducing the £1.5 million pension pot back to the level it would have been before tax relief was granted.
The abandonment today of the 55% tax charge now means that the full value of a maximum pension pot inclusive of higher rate tax relief (making up around a third of the value) will now pass to a pensioner’s dependants outside of the inheritance tax regime.
What’s more, the dependants of the wealthy and well advised will, with a bit if planning, be able to use this £1.5 million value tax efficiently. In essence they should end up paying zero or just basic rate tax on a pension pot funded by higher rate tax relief as they drawdown as income over a number of years.
So, not only is it outside of inheritance tax, it’s also a tax payer funded transfer of wealth!
I’m all for pension reform but this is yet another policy that clearly favours the wealthy and well advised. Right now the government should be concentrating on tax cuts and savings incentives for the many, not the few.
No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.