Get ready for a wave of ‘downsizing’ pensioners

If you want to leave as much money as possible to your children, sell your house, live off the capital and leave them your pension, says Merryn Somerset Webb.

150407-pensions

If you want to leave as much as possible to your children, sell your house, live off the capital and leave them your pension

I wrote here that the change in the inheritance rules might kick off a wave of downsizing' from pensioners.

Why? Because you can leave your pension pot to your heirs 100%-free of inheritance tax (IHT) subject to them paying their own marginal rate of income tax on withdrawals if you are over 75 on your death.

This means that, for those that want to leave the maximum possible to their children, it makes sense to leave your pension as intact as possible and to live on any other money you have. And the ideal way to do that is to sell your house, downsize and live off the capital instead of touching your pension.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Not everyone agrees with me on this. One commentator notes that it has been possible to achieve the same effect up to now by downsizing, giving the released cash to your kids and then living on your pension. Yes, not many people downsized under these circumstances. But this seems to me to be an entirely different kettle of fish, for two reasons.

First, for the cash to be passed on entirely IHT-free, you had to live for seven years after the transfer. If you are under 80, the odds are in your favour, but there are no guarantees on this one.

But the main reason I suspect people don't much fancy downsizing and passing on comes down to control. No one knows how long they will live and how much money they will need as they live so passing on money can feel very dangerous.

The new pension rules make that a non-issue. You get to keep the money from the downsizing, keep full control of your pension and still pass everything in the pension down on your death IHT-free. So why wouldn't you?

I see a wave of downsizing by the financially rational ahead. Housebuilders: it is time to get on with building the over 55s the kind of houses they want to live in.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.