IHT risk makes personal accounts less attractive
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The news that lump sum death benefits from personal accounts will potentially be liable for inheritance tax is likely to cause companies and individuals to look to alternative pension schemes rather than risk a hefty tax charge, according to Hargreaves Lansdown.
Death benefits paid out before retirement are generally exempt from IHT.
In order for benefits to be paid outside of the member’s estate, the trustees of the pension scheme must exercise discretion over who receives those benefits.
This involves consulting on where the benefits should be paid.
As a low cost scheme, personal accounts cannot afford to exercise discretion in every case and therefore will simply pay benefits to the beneficiary nominated by the member.
As such, benefits may fall into the estate and potentially be liable to inheritance tax of 40 per cent.
Personal accounts are targeted at lower paid employees but some higher earners will be enrolled and some lower earners’ homes may take up much of their IHT-free allowance.
Also, the Treasury can choose to freeze or reduce the IHT threshold at any time.
Pensions analyst Laith Khalaf says: “Consequently fewer employers will sign up to personal accounts when they can choose an alternative pension scheme which potentially saves members 40 per cent of their fund on death.
“We understand why Pada have taken this decision, nevertheless it will impact on the appeal of personal accounts and it will add complexity to the pension system.”
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Readers' comments (5)
Anonymous | 3 Nov 2009 2:03 pm
Very interesting - but of little real value. I suspect; OK so perhaps the monies won't fall outside of the estate, but the actual absolute number of people that this is likely to affect is probably less than the number of fingers on my left foot. If a worker accrues a large PA accrued fund then, perhaps, (s)he should be looking at transferring away (is this possible?) or even annuitising, depending on the situation. As a corollory, the IFA (will we still exist?) could effect some straight life cover written in trust.
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Richard Ross | 3 Nov 2009 3:09 pm
this really is clutching at straws!!
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Phil Castle | 3 Nov 2009 3:29 pm
I agree with both anon and Richard above. This is a NON issue as anyone likely to get caught be this deserves what they get for being so stupid to not have taken advice or if they did, their adviser deserves the upheld claim for negligent advice which could result in them lossing PI and hence going out of business.
A non issue, non story I think.....
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Anonymous | 4 Nov 2009 2:17 am
I disagree, the government has championed personal accounts as the best pension for lower earners. Just because someone is a low earner, it doesn't mean they don't or won't have other assets. They are supposed to be simple and for people who don't need or can't afford financial advice. The real point it is another nail in the coffin of Personal Accounts. They will never see the light of day.
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Anonymous | 4 Nov 2009 11:36 am
Hi, Anon 1 here again.
Anon 2 says "Just because someone is a low earner, it doesn't mean they don't or won't have other assets". Agreed, but let's just add in the fact that the IHT exepmtion level is currently £325K - or potentially £650K for a legal couple. I would suggest that if they are "breaching" these limits then they should be taking financial advice, preferably independent, and this should then cover all angles. If they dont take any financial advice then, well, I will let Phil Castle (above) speak for me. So, it's not another nail in the coffin at all, though I agree with Anon 2 in that PAs may never see the light of day
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