Not long now. In a mere eight weeks, George Osborne’s pension freedoms will become reality: 320,000-odd people per year will have a new list of choices about how they use their pension. Anyone over 55 will be able to take as much money as they like whenever they want from their pot, subject to paying their marginal rate of income tax on the cash.
The reaction to this has been hugely positive and the financial industry is happily gearing up for a world in which retirees with large lump sums are looking for products to buy. Meanwhile, the government expects the cash-in option to be so popular that by 2018/2019 it will be collecting an extra £1.2bn from people withdrawing lump sums. But here’s a thought: given what a good deal pensions now are, might it not be better to put more money into them rather than to take money out?
Late last year George Osborne announced the abolition of the so-called ‘death tax’ on pensions. For an explanation of what that is, watch this video, but the effect is that all assets held inside a pension fund can be passed on to heirs regardless of whether the original pensioner dies before or after the age of 75, and whether or not any money has already been withdrawn. Heirs can take out the money as and when they like, paying income tax at their own marginal rate.
This makes the new regime “dramatically different” from the old, says George Bull at accountants Baker Tilly. Given that it makes a pension the only asset entirely free from inheritance tax, it creates a huge incentive to leave as much money as possible inside a pension scheme. It is surely “such a good deal” that it should encourage people who have doubts to embark enthusiastically on pensions auto-enrolment.
It might even be worth switching Isas into pensions to take advantage of the pensions inheritability. If your estate is large enough that cash inside your Isas will end up subject to inheritance tax, it should be possible to shift the cash into a self-invested personal pension and remove it from the net. (This may need to be done in stages, depending on annual pension contributions limits.)
That said, this does come with risks.
The pensions regime is now so generous that it’s hard to imagine it will stay as it is. A Labour government may well remove inheritability. And if too many people spend their cash on cars and holidays, we may soon find a compulsory annuities system reintroduced. Nothing reliant on the whims of government comes with real guarantees.