Many of financial advisers’ clients in retirement – pretty much all their richest ones – regard their DC pensions as inheritance tax plans and only plan to draw on them as a last resort, according to Platforum’s findings in our recent report on decumulation advice. DC pensions on death can cascade down the generations free of IHT – although not income tax.
Such clients can rely on their income from generous DB benefits, the state pension and other investments to fund their day-to-day living, leaving their DC pension as intact as possible.
Now that the Budget has in effect abolished the lifetime allowance and increased the annual allowances, advisers might be tempted to encourage clients to shovel yet more money into the DC pensions to avoid IHT. They should be careful.
The generosity of pensions’ IHT treatment was already being questioned before the Budget, including in a recent report from the Institute for Fiscal Studies. The changes announced in the Budget have directed a spotlight onto this tax privilege.
Even if Jeremy Hunt holds off restricting the freedom from IHT on DC pension funds, chances are that a future Labour government would not be so lenient.
For several years we’ve been highlighting advisers’ increasing reliance on pensions for inheritance tax planning – most recently in our UK Financial Advisers: Advice in Decumulation report. The tax reliefs agreed by successive governments were designed to encourage people to provide for their retirement – not to avoid IHT.
Removing the IHT privileges enjoyed by DC pensions would be relatively easy and would have little or impact on doctors’ DB pensions – the main targets of the LTA removal.
It makes sense for advisers to encourage their clients to invest more in their DC pensions, but primarily for retirement income. The freedom from IHT should be regarded as a fortunate bonus that might not be around for long.