Steve Bee: Pensions should be made inheritable

Let’s do something really radical and remove all tax incentives that encourage people to entrust their savings to the pensions industry.

To continue as we are would be a triumph of hope over experience.

I quite agree.

As someone in drawdown, I began with exactly this in mind.

However we have had many years of Brown's class warfare to put up with. Perhaps common sense may return to government thinking?

The current arrangements are a result of an unholy alliance between the self interests of the pensions industry , the Revenue and the corrupt gang , of all parties , who we elect to run the State .

It is one of the great injustices of life that we are forced to buy annuities at 75 . Annuities are an appalling investment particularly when invested in Gilts

There is absolutely no reason why taxpayers should not be entitled to remain self invested if they wish through Sipps and the like .

The value of the fund would no doubt need to be include in the IHT pool on death of the last surviving spouse since tax relief has been given on the premiums .

The current arrangements are tantamount to 100% confiscation of capital for pitiful returns

I hope the next generation will learn and keep their savings out of the grasp of this industry and our discredited elected dictators.

For those paying standard rates of income tax there are no significant tax advantages in paying into a pension scheme. This is a myth put around by those who wish to encourage increases in personal pensions.

You get relief at the point of investment and then pay income tax when you draw down on the pension scheme.

There appears to be some strange idea that like ISAs, pensions are not taxable.

Unfortunately they are counted as income and taxed in precisely the same way as any other income.

I will not mention the complexities of the Age Related Allowance that complicates the matter even more, but it appears that for some pensioners we are being charged something in the region of 35% as a result of income tax on pension and the loss of Age Related Allowance.

Incidentally, the latest cunning plan to eminate from government seeks a charge/contribution of £20,000 at some point from each of us to pay for adequate care in old age. May I respectfully point out that there will be many citizens who will have 'nil points' in their estate at any stage and therefore those that do will have to make a larger contribution to pay for this shortfall?

If the current requirement to purchase an annuity at the age of 75 were cancelled and I could leave my pension pot as a pension to my descendants then:

The gainers would be my children, grand children and probably great grandchildren.

The losers would be the pension industry.

I know whose side I am on.

I get the impression that the pension issue is largely down to how much we trust the pension industry and the politicians. - a mountain to climb I fear Steve!

stan

This sounds an attractive idea to counter the obvious dislike of the 75 age limit. The downside is that it will deepen the divisions in society whereby wealth cascades down the better off families while the less well off, (and this will include the majority, who either could not afford pensions in the first place or who actually need to cash in their funds for pensions to live on) become relatively more poor. The wealth divide is already increasing and we should not be trying to make it worse. I don't see why the well of should be using tax breaks, often at 40% to effectively give money to their children who as the children of the well off are more likely to be able to fund their own pensions anyway, as the statistics on social mobility show. We should remember that a tax break for one person means tax needs to be paid by someone else. Tax is an unfortunate necessity unless you want to live in a mud hut.

Pension managed by the pension industry have not proved worthwhile for many people, unless you are a civil servant.

I decided in my early 30s that I would manage my own retirement funds and not use government "controlled" pension funds, as government appears to be the same sort of oxymoron as "Intelligence Service". My investments in property and high tech industry with some spread into banking and global industries has proved successful with returns over 30+ years managing 6-10% over inflation. Now I am retired comfortably thank you. I can recommend that approach to anyone in their 30s but don't expect a quick buck and do expect to work at it, after all pension fund managers that are successful work at it and make a good living. I think I did as well as most of them without paying them hence 3% better return than the moderately good ones. It does involve some luck and some intelligence.

It would help the whole of society rather than just the insurance industry to allow pension rights to be transferable down the generations.

At a time of fiscal tightening and a looming deficit why would any government want to give a tax break, as advocated above which would disproportionately benefit the rich and wealthy.

I'm all for granting flexibility and treating people like adults no matter what their age but the pensions regime is tax favoured. The government gives a lot away with pensions, despite some of the comments above. Tax relief of up to 40% on the way in, tax free roll up on a huge asset, a 25% tax free lump sum. One of the few clawbacks of this benefit is the taking of tax through income when the pension is drawn (and lets remember that investors can time their payments now to reduce the impact of higher rate tax, if at all).

To allow the pension pot to pass through the generations(without any IHT consequences) would of course mean that it eventually comes back in taxes to the state (when it is finally drawn as income) but crucially it extends the length of the tax free roll up benefit which can be substantial over time. The effect will be extend the assets of wealthier families.

So I'd be all in favour of the move but with a tax charge on death benefits when the assets are moved out, otherwise pensions just become another clever tax fiddle for the rich which those on modest means will have little or no chance of benefiting from.

At a time when politicians are looking for savings and playing to the Baby Boomer gallery (extending ISA allowances for over 50s) whilst hammering Generation X and their kids (proposals to cut back Child Trust Funds) this just doesn't seem a sensible idea.... although I'm sure popular with the self serving Baby Boomer generation.

OK before I come to the main article, I just need to counter one or two statements here which are guilty of gross mis-leading.

Firstly, Dave, you argue that basic rate tax payers have no tax advantages investing in pensions since the taxed income defeats the gain of tax relief. This advice is actually WRONG for two reasons.

Firstly, 25% of the pension fund can be taken as a TAX FREE lump sum - this portion represents a pure gain as opposed to investing in ISAs.

Secondly, when you reach 65, your tax-free income allowance is greater. This means a 65-yr old retiree will have less of their income taxed then, say, a worker of a younger age, thus making it more tax efficient to save for a higher income later in life (although this is not exclusive to pension income I grant you).

The "radical" change that Michael talks of would actually be a brilliant idea if everyone took self-responsibility. Unfortunately, many people are very poor at saving for tomorrow and thus encouraging people to save into time-locked investments that we call pensions is, to some extent, the only way to avoid a much greater crippling burden on the poor old tax payer for the droves of ill-prepared retirees who suddenly spent all their ISAs and retirement savings before giving up work. So overall, it's an insane proposal, alas.

Steve's idea is a brilliant one. Invest your pension, live off the investment income within an alternative product and allow future generations to pass it on for retirement.

Done right, this works beautifully because the years of investment growth on the inherited fund after being passed on would hopefully counter the effects of inflation before the next descendant stops work and lives on the income until their own demise (and passing it to the next person down of course).

This means that future generations would have far less burden to save as hard for retirement thanks to the fore-sight of their ancestors but still gives them the option to better the legacy themselves also.

Having said this, I don't agree with just letting people strip out the cash in lump sums. Yes, hate me for being so "Nanny State" about it but the fact is, we all know there are a large proportion of people who will spend the money and cost tax payers a lot more to be bailed out when they run out of funds and live longer then planned.

Having said this, confining people to annuities which are ashamedly unfair on the short-lived, is also a terrible curse. Allow people to pass on their retirement pots, let them choose the investments to support their income and let them take the income generated alone from their own money if they wish.

Overall, a great proposal but it would need to be introduced with provisories to prevent a massive cost to the tax payer.

Insofar as I can remember this is the first time I have heard such a thought. Well done! R

What utter rubbish!

How are insurance companies going to calculate annuitiy rates if pensions are inheritable?

I have always understoon that the whole point of pensions (as opposed to savings) was that contributions to pension funds attracted tax relief on the "no double taxation" principle, the idea being that tax relief was given at the time of contribution but would in due course be levied when the pension was paid.

If pension pots are to be passed down through the generations, the Revenue will have to wait a helluva long time before it gets back its tax relief.

I simply can't see this happening.

Daniel

You have obviously no idea of the Age Related Allowance or how it works.

Although this is available at the age of 65 depending on the amount of pension you receive it can and is reduced to the same tax allowance as for those under 65.

I am afraid that for those who have been prudent there is no advantage whatsoever.

I would seriously advise all those approaching pensionable age to find out more about how the ARA works.

Am I missing something here.

Several people have objected to this idea as they claim it would leave the tax benefits within the pot and keep them from the government. Surely if you buy an annuity then the government will never see those 'tax benefits' again as when you die the pot goes to the annuity provider. That is the status quo that we have.

Also if the children/spouses take the cash (cash in the pension pot) they will have the tax stripped out

It seems to me that the big advantage of pensions is that the tax relief should be growing from day one on top of your original investment. The downside is not only the tax on the income but more so the lack of incentive for the pension provider. As pointed out in the Times recently there is none. it is about time that pension providers stopped taking a percentage of our investments and started being rewarded on performance. O.k. so several companies would go out of business as they never perform - good - better for us the investors.

But surely there is a human rights issue here - why should the government have the right to force us into Annuities - it is our money and we should be able to decide. By the way to the person who could not see how annuities would be calculable. you are missing the point they are stil annuities and any money used to purchase one would be lost on death as per the present.

At least we would have the choice and maybe we could part invest in an annuity.

I am currently doing all I can to deplete my pension while my ISAs grow because of the tax on the pension income and the annuity threat. Also the pension pot is only accessible in small percentage amounts whereas you can enjoy any profits from the ISAs as you please. (given some of the comments I would love to know their opinion of advice given out by Standard Life to my wife and I - "you should deplete your ISAs first, in fact you should reduce your ISAs to 5% before touching your pensions")

No we did not take it and have officially complained.

Well done Steve Bee an excellent idea to allow us to stop the government taking away our savings.

Its a nice idea, but for those of short memory, this is pretty much what was in the initial Simplification legislation for DrawDown - and then kicked out because the Government thought it was a tax fiddle (which it wasn't in practice). Can you really see them, or the next regime, changing their minds when they need to grab every penny they can.

Those who need to buy annuities generally need every penny they can get. If the residual fund passes on to family, there is no mortality uplift from the Insurance Companies, which means that the neediest pensioners suffer most. Not bright.

Back to the drawing board.

Steve - Think you have started a Movement for Change.

This is something I have been praying for - for years. Of course there are taxation issues - but the government needs to encourage savings for retirement and this is the answer.

The 'issues' can be addressed by imposing limits - such as the lifetime allowance which is already in place.

I wish I could leave my ISAs intact to my children/grandchildren - but thats not possible either, but the use of a Family SIPP should not only be allowed but be encouraged - if people are to regain trust in investing in any form of pension!

Pension pots should be heritable, but with conditons. Before that point is reached there should be some changes to the personal pension sysytem.

1.Remove tax relief on premiums and put it with pension income. Reason, never invest for the tax advantage.

2.Establish a pension index to be the reference point for a pension funds .Individuals and funds can decide to be more or less cautious. Index reviewable at least quarterly.

3.Remove the annuity requirement. Not appropriate for everyone.

4. Pension pots to be heritable. Only as pension funds. If the gift is accepted and used (drawn on as a pension) then the beneficiary is removed from the state pension. The beneficiary can decide at pension age but rejection gives the fund to the state. Something for everyone. As the scheme grows so the dependence on the state reduces and these funds grow over generations.

Isn't this largely down to disatisfaction with current annuity rates: if I've got this right: no more than 6% on the single life of a healthy 60 year old male. (and substantially less than that if you have 2 lives to insure or want index linking)

Can't I manage a reasonably safe 6% on a well considered fund without touching the capital?.....

But don't forget that tax releif at 40%!

If you were 59, a higher rate tax payer and could put all your surplus income for this year into a pension pot, would you do it? I can't decide.

Dave, yes you are right about the age allowance and how it can be reduced proportionally for higher retirement incomes so you are right to make this point clear.

However, for a small segment of lower-income retirees, the allowance IS still greater then throughout working life and even despite this, the tax free lump sum is still an undisputed advantage over any other investment with the pension, thus I would have to stand by my dispute with your initial statement that pensions are not more tax efficient then other investments.

Cyril, you make a good point. In truth, the traditional method of calculating annuity rates goes out the window.

I would imagine GAD limits will be used together with investment performance to allow for a flexible, yet sustainable income throughout retirement. Esentially mortality is no longer a contributor; instead it is purely down to returns on the fund itself.

George, you make the point that the Revenue would have to wait a long time for its tax to come back. Not necessarily though, if we assume any income drawn is taxable and every generation draws from it. In this instance, the person who contributed will pay tax drawing an income in their own retirement. The only instance where your concern rings true is if someone pays into a pension and then never draws from it, simply to pass the whole lot onto their kids for THEIR retirement. (I can't see this happening personally in the majority of cases).

If you die before you convert a pension to an annuity it forms part of your estate when you die.

Of course you have to convert a pension to an annuity at the age of 75 so this does not apply to those over 75 at present.

There are a huge number of voters out there who would not agree with this suggestion .

The fact that , despite our financial disaster , there are a considerable number of people who will still vote Labour , can only mean that they want all this pension money and more to be taken by Brown and Co. to continue to recklessly squander .