Quit your final salary pension, pay less IHT
Savers are cottoning on to a new opportunity to pass on their pension free of inheritance tax. Sam Brodbeck explains
Generous new tax rules have led to a surge in savers giving up their final salary pensions in favour of lump sums that can be left to their children without inheritance tax being due. The ability of savers to move money in final salary schemes to other types of pension that can be passed on to their heirs is fuelling a £50bn boom in transfers, financial advisers report.
Members of final salary schemes, which are also known as “defined benefit” plans and pay a guaranteed retirement income based on salary and length of service, have always had the right to swap them for a “defined contribution” pension pot, which is a sum of money that would normally be invested to produce an income or used to buy an annuity.
But until recently demand for such transfers has been muted because the inflation-linked income provided by final salary pensions was seen as the “gold standard” and because the transferred money would attract punitive taxes if passed on at death.
However, greater control over transferred pension pots as a result of the “pension freedom” reforms introduced in 2015 and other tax changes, along with historically generous offers to those who ditch final salary schemes, is tempting more people to do so.
Over the past two years around 210,000 people have moved pensions worth £50bn out of final salary schemes, estimates Mercer, the
People with final salary pensions are realising that the taxation of unused pensions on death is far more generous under defined contribution arrangements.
Final salary schemes will typically pay a “spouse’s pension” after death worth half or two thirds of the original member’s annual income. Normally the pension will die entirely on the death of the surviving husband or wife – children will not receive anything unless they are under 23.
Conversely, money held in a defined contribution pension can potentially cascade down the generations indefinitely. This is because the pension “death tax” was abolished in April 2015. Previously, unspent pensions faced a tax charge of 55pc, more penal than the 40pc inheritance tax rate. Now they will pass on entirely free of tax if the saver dies before the
Peter and Sonia Freeman of Norfolk are among the many people who face the prospect of selling their business thanks to the new stamp duty surcharge. Business owners who live above their shop or pub are being hit by the extra tax.