The changes brought in firstly through pensions simplification and then through the pension freedoms has made many of the issues we used to have with passing pensions down the generations a thing of the past.
Death benefits were one of the changes that were originally thought to be a step too far with the pension freedoms and a u-turn was expected by many. It hasn’t come and I really don’t think it will, at least not any time soon.
The amount that can be passed down tax free is still restricted by the lifetime allowance, the changes to the benefit crystallisation events saw to that, so it isn’t a free for all. Yes, we can pass funds down the generations that may be free from inheritance tax and free from income tax if you die before age 75, but how much tax is actually lost on this?
Take a wealthy client, they may well be able to avoid accessing their pension funds immediately and plan to leave the funds to their children or grandchildren, but they are likely to live into old age. Once they reach the age of 75 their funds will have been subject to lifetime allowance tests and any income or lump sum taken on their death will also be taxable as income on the beneficiary. This means that the Treasury won’t really be missing out on a lot.
For those with less the likelihood that they can avoid accessing their funds will be less so more income tax would be payable in life and less funds would be left to their beneficiaries.
What we don’t know about just yet is what happens when funds are not accessed for many generations, this could mean a complete lack of income tax paid on the funds. As we know there are no limits on the amount of times the funds can be passed onto the next generation. We are only a few years into the pension freedoms and so I feel this is the part that could change in the future if the Government sees that funds are just rolling up forever and a day in the tax free pensions world.
I still feel that this was one of the biggest changes we have seen in recent years, it is great for planning and for advisers and their clients to retain their wealth in a tax free environment for future generations.
Claire Trott, head of pensions strategy, Technical Connection Ltd