Pension experts urge savers considering transferring their occupational pensions to different schemes to take professional advice. In some cases, taking advice is a legal requirement. If you’re in poor health, it is crucial: shifting your pension could leave your heirs facing an inheritance tax (IHT) bill if you die shortly thereafter.
A landmark legal case just concluded after a long battle between HM Revenue & Customs and a bereaved family underlines the risks. HMRC argued that a mother with a terminal illness had transferred out of one type of pension plan into another knowing she would not live long enough to claim retirement benefits.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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
The Supreme Court steps in
The dispute took more than two years to resolve, with the Supreme Court finally ruling against HMRC last month.
However, pension advisers warn that the ruling was based on the individual circumstances of the case and that HMRC may continue to argue the principle in similar situations. The case has serious implications for savers in ill-health. When someone dies, it is only pension transfers that have taken place in the previous two years that have to be declared to HMRC as part of the assessment of whether any inheritance tax is due. Transfers undertaken previously automatically fall outside of the tax net.
But HMRC’s view is that a pension transfer made with the deliberate intention of reducing a potential inheritance-tax bill should not be allowed to deliver this benefit. It has therefore sought to tax families it judges to be in this position. Last month’s legal ruling effectively places some limits on HMRC’s powers, but it does not take them away altogether. Every case is different. Broadly speaking, savers transferring out of some old-style pensions set up several decades ago are at most risk of being caught out, because money in these policies falls within the inheritance-tax net, unlike the savings in most other types of pension.
This was the type of policy considered in last month’s case. However, transfers out of defined-benefit schemes into defined-contribution plans may also be caught, because such switches sometimes increase the size of the estate it is possible to leave to your heirs. The bottom line: seek professional advice on any transfer, especially if you’re in poor health. Otherwise you may leave your family with a knotty tax problem.
Fixed fees will feed on your savings
Are you paying fixed fees on your workplace pension plans? If so, these could destroy the value of your savings – particularly where you have small pots of cash to which you are no longer contributing, such as plans with previous employers.
Most workplace pension schemes charge fees as a percentage of the value of your savings. Unfortunately, some levy a fixed cash amount instead. Where your pension savings are small, such charges will erode the value of your money over time. They could even wipe it out altogether, according to pensions specialist LCP.
The firm is urging the government to abolish fixed fees as part of its wider review of the pension charges that providers of workplace pensions are allowed to make. Such fees are particularly damaging for low-paid workers, LCP points out, potentially undermining their efforts to save for retirement. In the meantime, however, savers with small pension amounts should check how they are being charged. It may be possible to consolidate your savings by transferring old pensions to a scheme that offers more competitive charges.
-
David Ellison: America's new media mogulDavid Ellison is building a mighty new force in old and new media. Critics worry that he will prove to be a Trumpian patsy. Is that fair?
-
Investors have overlooked some of China’s best growth stocksOpinion Dale Nicholls, portfolio manager, Fidelity China Special Situations, highlights three Chinese businesses where he’d put his money
-
Can Rachel Reeves save the City?Opinion Chancellor Rachel Reeves is mulling a tax cut, which would be welcome – but it’s nowhere near enough, says Matthew Lynn
-
'Gen Z is facing an AI jobs bloodbath'Opinion It has always been tough to get your first job, but this year, it's proving tougher than ever. AI is to blame, says Matthew Lynn
-
Beazley: a compelling specialist insurerThe insurer Beazley is unusually profitable at present, and that looks set to continue. The stock is also a valuable portfolio diversifier, says Jamie Ward
-
Is Britain heading for a big debt crisis?Opinion Things are not yet as bad as some reports have claimed. But they sure aren’t rosy either, says Julian Jessop
-
Simple assessment explained as millions brace for unexpected tax billsIncreasing numbers of people could get letters from HMRC saying they owe more tax due to frozen thresholds, under a system known as simple assessment. Here is what it means for you.
-
What is the Enterprise Investment Scheme and should you have one?The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
-
What are wealth taxes and would they work in Britain?The Treasury is short of cash and mulling over how it can get its hands on more money to plug the gap. Could wealth taxes do the trick?
-
Self-employed? Start saving for your pension nowBritons who are self-employed have neglected to build up their retirement fund. They must act now
