Quit your fi­nal salary pen­sion, pay less IHT

The Daily Telegraph - Your Money - - FRONT PAGE -

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.

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