Fears of an IHT attack on pensions may have ‘boiled over’, says money expert BILLY BURROWS

William Burrows leads The Annuity Project and is a financial advisor at Eadon & Co.

There’s no doubt that Rachel Reeves’ announcement that unused pension pots will be subject to inheritance tax from April 2027 is bad news, but is it as bad as many people say?

Recent headlines on this issue, such as Reeves’ raid on inheritance tax, which puts millions at risk of poverty later in life, or on inherited pensions, could see a ‘double tax burden’ of up to 70.5 percent, a bleak picture sketches and cast a dark shadow over the pensions.

But I don’t think we should be so despondent or worried; it should not have a detrimental impact on most pension schemes, and where it does there are some simple things that can be done to reduce the impact.

To be clear; those with very high pensions are likely to eventually see their unused pension pots subject to inheritance tax, but even those with above-average pots should be able to avoid this.

Why do I think this topic is overcooked? There are three reasons:

– The new rules should only affect people with very high pensions

– More people will benefit from income from their pension

– There are simple and legitimate ways to reduce inheritance taxes.

One of the problems with pensions is that people have a different perception of capital than of income.

A pension pot of £1 million seems like a lot of money, while £40,000 a year seems like less money.

But in terms of pensions they are the same because £1 million buys an inflation-linked pension of £40,000 a year for a married couple aged 65 and 60.

If you do not want to commit to a guaranteed pension, you can invest in pension withdrawal and take the same income amount. With standard assumptions this will last until your normal life expectancy, but there are risks involved.

If investment returns are lower than expected, you run the risk of running out of money before you die. However, if the return is higher, you will have money left over to leave to your family.

According to the Pensions and Lifetime Savings Association, a married couple needs a pension income of £59,000 a year for a comfortable retirement, and that is after tax and does not include housing or healthcare costs.

The point is that most people will have to use some or all of their personal or company pensions on top of their state pensions to get this income.

Sure, they can use their Isa, savings and investments instead of their pension, but how many people have enough personal wealth to generate this amount of income without touching their pension?

Remember, it’s wise to keep a decent rainy day fund of savings, so not all savings need to be used for income.

Income from Isa savings is not subject to income tax, while income from pensions is subject to income tax. It is therefore important that people receive advice about the most tax-friendly way to arrange their income after retirement.

All this means that although many people think they will leave their pension pot to their children, in reality they can use the majority of their pension pots to provide income for themselves and their spouse.

If the pensioner dies first, the pension pot can be transferred to the spouse or registered partner without inheritance tax being due. On their death there will be a £1 million inheritance benefit that can be used if they leave their home to their direct descendants.

You can also reduce the value of your pension pot by gifting money to beneficiaries before your death, after paying income tax.

Regular donations of excess income can be immediately free of inheritance tax, otherwise you will have to live longer than seven years to avoid inheritance tax.

It’s still early days in terms of planning for the changes to inheritance tax, but most commentators agree that getting more income from pensions will make sense, and that won’t be a bad thing.

The math can be complicated, but if people don’t take income from their retirement at the right time and in the right way, they can be “throwing money down the drain.”

Simply put, there is an opportunity cost associated with not withdrawing income from your pension. Take a pension pot of £100,000 and suppose it could produce an income of £6,000 a year.

If income is deferred for a year, £6,000 will not be withdrawn. Over five years, £30,000 will be given up.

In many cases, the income taken in the future will be higher, but in many cases it will not be high enough to compensate for the income given up.

This means that delaying receiving income can result in a lower lifetime income.

Annuities are misunderstood because they are not “legalized theft” by insurance companies; they are the optimal way to maximize lifetime income without risk.

Therefore, if income is to be derived from pensions, annuities should not be overlooked.

I can understand how imposing inheritance tax on very large unused pension pots will result in higher inheritance tax bills, but for the majority of people, with good advice about their retirement income, they should be able to maximize both their own lifetime income as to maximize its amount. they live for their children after paying all the taxes.

Finally, it has been my experience that expectations change with age, especially as people underestimate their life expectancy when they first retire.

Generally, when people first retire they place a high priority on leaving a legacy, but as they get older they realize that they may need their pension pots to fund their own retirement, especially if there are expensive healthcare costs are required.

Adult children usually also have a better financial basis by then.