PERSONAL ACCOUNT

If your assets are likely to incur death duties and you have a pension, read this

Like it or not, tax and financial legislation drive our behaviour. If a government suddenly increases the taxation of a certain investment, for instance, you could reasonably expect the popularity of that investment to fall.

Real life is generally more complicated. When new taxes or legislation are introduced there are inevitably responses from the taxpaying public that the Government – or anyone else for that matter – didn’t quite expect.

Take Britain’s pension liberalisations of 2015.

The consensus among those who criticised the reforms at the time was that over-55s, given free access to their pension money, would spend it all at once on luxuries such as the oft-cited “Lamborghinis”.

In fact, while a parliamentary committee did last year uncover a few extreme cases of individuals who had gambled or drunk away their entire pensions, most over-55s so far appear to have been careful.

There is one extreme scenario in which a group of well-off individuals are being so careful that they’re making it a priority

to spend their pension at all. And that’s because one effect of the 2015 reforms was to transform the pension into an efficient vehicle for avoiding inheritance tax (see page 3, opposite). estate but, until the reforms of 2015, they attracted a high rate of tax on their owner’s death – whether or not there was any inheritance tax due on other assets.

George Osborne’s reforms ended that system. For whatever reason – and this remains a mystery to me, given that Mr Osborne generally increased the taxation of wealthier people during his time as chancellor – he decided to abolish the tax that applied to pension assets on death.

Instead, where the owner of the assets was over 75, their heir would pay tax on the money only when drawn, at his or her rate of income tax.

Suddenly there was an incentive not to draw on a pension.

What profile of person does this help? Could it be you? Well, if your property and other wealth mean your estate is likely to incur death duties, and if you have money in a “defined contribution” or “pension pot” style pension – then yes. There probably is room to whittle down your inheritance tax liability by preserving your pension and spending other assets instead.

The strategy can save many people a great deal of tax, as pension pots of around £1m (more in some cases) can be passed on tax free.

Critics thought the pension reforms 2015 would encourage reckless spending. Here, they’ve done exactly the opposite.

Overnight, your pension became a neat way to avoid inheritance tax

The pension reforms were not primarily about tax – but offered a new loophole