Sharp rise in savers us­ing pen­sion pots to shel­ter wealth from 40pc in­her­i­tance tax

The Daily Telegraph - Your Money - - FRONT PAGE -

Bil­lions of pounds are be­ing passed down the gen­er­a­tions – and by­pass­ing in­her­i­tance tax – as savers ex­ploit a lesser-known ad­van­tage of the “pen­sion free­doms”. This set of re­forms, ap­ply­ing from April 2015, made it eas­ier to pass un­used pen­sion as­sets from one gen­er­a­tion to an­other. New fig­ures from the City reg­u­la­tor re­veal the ex­tent to which fam­i­lies are now ben­e­fit­ing from this.

A Free­dom of In­for­ma­tion re­quest ob­tained by Tele­graph Money shows how much money has been moved into “draw­down” ac­counts by peo­ple of dif­fer­ent ages – in­clud­ing those un­der 55. “Draw­down” ac­counts are those where savers can ac­cess their pen­sion cash but for the most part it con­tin­ues to be in­vested.

Peo­ple need to be a min­i­mum age of 55 in or­der to move their own money into a draw­down ar­range­ment. So where younger age groups are shown to have these types of ac­counts, it can be as­sumed that they have in­her­ited the money from some­body else, typ­i­cally a par­ent.

In the 2016-17 tax year as much as £2.1bn was held in draw­down ac­counts by un­der-55s, sug­gest­ing it was in­her­ited. This rep­re­sents a rise of about a third on the pre­vi­ous year, when £1.6bn was in­her­ited. Tim Holmes, of Sal­is­bury House Wealth, a fi­nan­cial ad­vice firm, said the fig­ures showed how pen­sions were be­ing used as a “multi-pur­pose tool” in in­her­i­tance tax plan­ning.

The 2015 pen­sion re­forms, the brain­child of then chan­cel­lor Ge­orge Os­borne, in­cluded abol­ish­ing the 55pc “death tax” on pen­sions. Since then, money is passed on en­tirely tax-free if the orig­i­nal saver dies un­der the age of 75.

Where death oc­curs over 75, re­cip­i­ents pay tax at their usual “mar­ginal” rate of in­come tax. With care­ful plan­ning, that means in some cases tax can be avoided en­tirely. For in­stance, a grand­child could in­herit a pen­sion and limit with­drawals to un­der £11,500 a year, the cur­rent level of the “per­sonal al­lowance”, and never pay any tax.

Mr Holmes said: “Be­fore the 2015 tax changes, there was a ten­dency to run down as­sets in pen­sion schemes. But now, if some­one wants to pass their pen­sion on, they will be look­ing to pre­serve as much value as pos­si­ble.”

As a re­sult of the changes ad­vis­ers now rec­om­mend savers spend their Isas or other in­vest­ments – which are likely to at­tract in­her­i­tance tax – ahead of their pen­sions.

More peo­ple are be­ing caught by in­her­i­tance tax as boom­ing house prices and stock markets have pushed house­hold wealth beyond the in­her­i­tance tax al­lowance, which has been frozen for years.

Each in­di­vid­ual can pass on £325,000 free of in­her­i­tance tax, and an ad­di­tional £100,000 where it ap­plies to a main res­i­dence pass­ing to di­rect de­scen­dants.

In­her­i­tance tax is due at 40pc on as­sets over this amount.

The pen­sion free­doms are open to any­one 55-and-over with a “de­fined con­tri­bu­tion” (some­times known as “money pur­chase”) style pen­sion.

These are the dom­i­nant form of sav­ing for to­day’s work­ers. When the free­doms were an­nounced there were fears some pen­sion­ers would waste their money on fast cars and be left with lit­tle or no re­tire­ment in­come. Around £16bn is thought to have been with­drawn this way since April 2015.

More peo­ple are re­al­is­ing they can avoid death du­ties us­ing pen­sion free­doms, re­ports Sam Brod­beck


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