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Keeping it in the family

The taxation of scheme pensions is to be brought in line with changes to Asp death benefits announced in last year’s pre-Budget statement. This effectively kills off small “family” pension schemes.

Changes already announced last December will introduce a Draconian 70 per cent tax charge on inter-generational pension inheritances.

In addition, inheritance tax continues to apply, making this form of estate planning redundant.

The minimum post-age 75 drawdown limit has been reduced from 65 per cent to 55 per cent of the “basis amount” in a minor tweak to the proposed changes. The maximum Asp income remains at 90 per cent.

These changes are, however, unlikely to stop people passing their pensions to their children and grandchildren. By taking income from age 55 and making third-party pension contributions, both the 70 per cent charge and IHT can be legitimately avoided.

In fact, if the children pay income tax at a higher rate than their parents, the tax relief on the money going into the kids’ pensions more than offsets the tax paid by the parents on income taken.

Although this is a bit disappointing, the simple workaround means that advisers can still use pensions as a tax-efficient method of gifting assets to the next generation.

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