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I last paid into my pension over seven years ago, will it be free of inheritance tax? STEVE WEBB replies Has your pension question been answered? Read Steve Webb's replies Most popular Steve Webb columns on the state pension: The 14 hot topics By STEVE WEBB FOR THIS IS MONEY Updated: 07:00 GMT, 18 November 2024 e-mail 2 View comments I had always understood my Self-Invested Personal Pension (Sipp) contributions were held in trust and that the trustees had the power to decide who payments from it should be made to after my death. As a result, I signed an expression of wishes form to say who I would like the recipient to be, but understood the trustees were not obliged to honour this. Since the whole of my pension contributions were made more than seven years ago does this mean that they are exempt from the recent budget proposal to add the pension pot to my estate for inheritance tax purposes? Your advice would be appreciated so that I can consider my options.
SCROLL DOWN TO FIND OUT HOW TO ASK STEVE YOUR PENSION QUESTION Inheritance tax: I last paid into my Sipp more than seven years ago, and the trustees decide who gets it - how will Budget changes affect me? (Stock image) Steve Webb replies: We have been inundated with questions since the Budget about how the proposed changes to inheritance tax will affect different sorts of pensions. It would be fair to say that there is still a lot that we do not know, not least as the proposal is currently subject a consultation and we are yet to see the detailed legislation. Hopefully I can clarify a few points which have caused confusion.
However, given that I am not a lawyer, and a lot of detail is still outstanding, the usual caveat about not treating the information in my column as financial advice is particularly relevant. The first thing to say is that the Budget measures are mainly focused on ‘unspent’ balances in ‘pot of money’ or defined contribution pensions as they are known. Certain other payments on death may also be caught in future, such as ‘death in service’ payments from defined benefit schemes.
Defined benefit and defined contribution pensions Defined benefit pensions provide a guaranteed income after retirement until you die, usually with lower benefits for a surviving spouse, explains This is Money. These are often called final salary pensions but many schemes have replaced career average earnings as the measure for benefits offered. Unless you work in the public sector, these more generous gold-plated pensions are now mostly replaced with stingier defined contribution pensions, where savers bear the investment risk.
Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement. But I will concentrate here on the relatively simple example of unspent money sitting in a defined contribution pension. (A full list of the different types of payments which may be covered is contained in Annex B of the Government consultation - Inheritance Tax on pensions: liability, reporting and payment.
From what we have heard so far, there is no reason to think that Sipps (Self-Invested Personal Pensions) will be excluded from the changes. Indeed, if the government *did* exclude Sipps but include workplace pensions this would create a massive loophole which would no doubt be widely used. You raise the question of what counts as part of your ‘estate’ and how the government can charge inheritance tax on something like a Sipp where trustees get to decide who inherits the pension.
The answer lies in the fact the word ‘estate’ can be used to refer to two different things. The gov.uk web page on what to do when someone dies says that your estate is 'the money, property and possessions of the person who died' - see Dealing with the estate of someone who's died.
Meanwhile, a separate gov.uk web page on inheritance tax says it is 'a tax on the estate..
of someone who has died'. However, there are things which are part of your estate which are exempt from inheritance tax, and there are things which are not part of your estate but which will be subject to inheritance tax when the changes from the Budget come into force. It is not surprising that there is confusion.
To give an example, if you die and leave money in your Isa to your spouse, they will not have to pay inheritance on this amount because it is a transfer between spouses. But the Isa is still part of the estate, and what happens to your Isa will be governed by the terms of any will. > How much is inheritance tax and who pays RELATED ARTICLES Previous 1 Next Most popular Steve Webb columns on the state pension: The 15.
.. Has Steve Webb answered YOUR pension question? Read all his.
.. Share this article Share HOW THIS IS MONEY CAN HELP What you need to know each week: Listen to the This is Money podcast Conversely, money in a personal pension or a trust-based occupational defined contribution pension has – until now – not counted as part of your estate.
In particular, as you say, it has been the decision of the trustees (informed by your expression of wishes) which determines where the money goes, rather than your will. From April 2027 it will *still* be the case that it is the trustees decide who gets money left in a Sipp. But the estate for inheritance tax purposes will from thence forward include the value of your pensions.
In short, that fact that the destination of your pension on death is not determined by your will does not mean that the government cannot levy inheritance tax on the value of that pension. You also raise the issue of money paid into a pension more than seven years ago. The reference to seven years before death relates to the inheritance tax rule which says (in essence) that if you make a gift and then survive seven years, this money will no longer count towards your estate for inheritance tax purposes.
Got a question for Steve Webb? Scroll down to find out how to contact him But it seems hard to believe that the government would decide that money you paid into your Sipp seven years ago would be covered by this exemption. In simple terms, money in your Sipp is still your money and (once you have reached normal minimum pension age) you could withdraw it at any time if you wished. Indeed, although the rules were written with different circumstances in mind, the gov.
uk guidance on inheritance tax and gifts specifically says: 'If you give something away but still benefit from it...
it will count towards the value of your estate.' On that basis, it is unlikely to make any difference when you paid the money into your pension when HMRC comes to assess how much inheritance tax is due to be paid on your death. Given that many This is Money readers clearly feel strongly about these changes, I would encourage you to share any concerns with your local MP if they will affect you in a particularly adverse way.
Ask Steve Webb a pension question Former pensions minister Steve Webb is This Is Money's agony uncle. He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement. Steve left the Department for Work and Pensions after the May 2015 election.
He is now a partner at actuary and consulting firm Lane Clark & Peacock. If you would like to ask Steve a question about pensions, please email him at [email protected].
uk . Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice.
Published questions are sometimes edited for brevity or other reasons. Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes. If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public.
It can be found here and its number is 0800 011 3797. Stev e receives many questions about the state pension and 'contracting out'. If you are writing to Steve on this topic, he responds to a typical reader question about the state pension and contracting out here.
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