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.
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.