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Weekend reading: Psst, pensions, pass it on!

Weekend reading

Good reads from around the Web.

I sometimes suspect a few of the great and the good read Monevator.

And maybe they do – but if so they are currently paying more attention to the comments. Or at least the debate in the comments in my recent post about high house prices.

Long story short: I argued that inheritance tax is one of the fairest of the various unpalatable taxes out there, and it should be whacked up accordingly.

Nearly everyone disagrees.

I won’t rehash that debate again, but I would recommend you follow the link above and have a read if you care about this issue, as there are some great points from all angles in that thread.

A civil and constructive Internet discussion! Perhaps I should notify the authorities?

Death to the death tax

It took less than a fortnight for the Conservatives to reveal they are to move the other way, and dial back inheritance tax even further.

You’ll surely have heard by now that ‘death tax’ is to be abolished.

As CityWire reports:

The government is to abolish the 55% pensions death tax charge, chancellor George Osborne has announced.

The measure will come into force in April 2015 alongside the pension reforms outlined in the Budget.

The new rules mean that if a person who dies is 75 or over, the person who receives the pension pot will only pay their marginal tax rate as they draw money from the pension. If someone aged under 75 dies, the person who receives the pot is able to take money from the pension without paying any tax.

Beneficiaries will be able to access pension funds at any age and the lifetime allowance, currently £1.25 million, will still apply.

Within moments of the news breaking, I posted on my personal Facebook wall that while I’ve agreed with most of the changes made to the pension system this year, totally abolishing such taxes will make pensions a charter for the rich to pass on millions free of inheritance tax.

And after an hour I was reminded again by my friends that everyone hates inheritance tax.

Keep in mind too that as I’ve mentioned before, most of my friends are – or think they are – pretty left-leaning.

The king is dead, long live the kings!

Anyway, before too long the wider media had picked up the scent, with the always-sharp Merryn Somerset-Webb noting:

A fantastic tax dodge for the already wealthy

[…] advice on pensions will now need to “dovetail” with that on IHT.

Quite. What were once personal pensions are now to be “family assets that can be very effectively used for intergenerational planning”.

Subject to the current Lifetime Allowance, families can pile £1.25m into a pension over time and leave it to be drawn down (or topped up) by descendants as they see fit.

I suspect that George Osborne doesn’t want us to go on about that bit too much.

Merryn also thinks that it might be a political gambit. She believes public sector workers could clamour for their schemes to be changed to enable them to benefit, too – presumably by moving them to defined contribution schemes (which may be less onerous on the State).

She could be right. For what it’s worth, I also suspect critics are correct that it’s futile to raise inheritance tax, simply because it’s so hard to collect. It’s already semi-optional for the rich, and generates little money accordingly.

Money for nothing

Given our previous discussions, I presume most Monevator readers would be very pleased with the abolishing of so-called death taxes.

And I can see the logic of giving people an incentive not to use the new pension freedoms to spend all their money at 55 – not to mention making avoiding inheritance tax more democratic and accessible.

But in an ideal world I’d still rather tax workers and entrepreneurs less, and tax the dead and the recipients of their unearned largesse more.

We don’t live in a society where the rich are having trouble growing any richer.

Quite the opposite.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Virgin Money’s new 2.1% fixed rate two-year ISA is a best buy says This Is Money.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • SCM is offering auto-ETF portfolios, but at 1.2% a year – ThisIsMoney
  • Vanguard study backs up buy-and-hold fund investing – Telegraph
  • The volatility of risk premiums – Swedroe/ETF.com
  • Bill Gross and fund manager performanceWSJ
  • Watch for ETF fees that eat up your returns – ETF.com

Active investing

Other stuff worth reading

  • “I get 3% interest from 11 different current accounts” – Telegraph
  • Where the rich live in England and Wales – Telegraph
  • You have no idea – Morgan Housel/Motley Fool US
  • A secret of Uber’s success? Struggling workers – Bloomberg
  • Understanding China’s hard line on Hong Kong – HBR
  • Perovskite: The solar wonder stuff – WSJ

Book of the week: Amazon has launched a new subscription service for readers. With Kindle Unlimited you can read all the books you like from a choice of 650,000, for just £7.99 a month. (Let’s just hope it doesn’t Napster the book-writing business, eh?)

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 28 comments… add one and remember nothing here is personal advice }
  • 1 Cerridwen October 4, 2014, 12:06 pm

    All this makes me wonder whether we’re losing track of what a pension is actually meant to be for. Surely the tax incentive is there because it is meant to be helping to provide a means of supporting ourselves after we no longer can/want to work? To prevent us from needing help from the state.

    Some wealthy people seem to have vast amounts invested in pensions, putting the maximum they can into them because of the tax relief, regardless of whether they will actually need so much wealth to fund a very comfortable retirement.

    This is a situation which this move by the government can only serve to encourage. It does very little for the 20% tax payer on an average wage who struggles to get enough into a pension that will see them through, never mind be there after they’ve gone.

  • 2 Neverland October 4, 2014, 12:32 pm

    I couldn’t agree with you more allowing untaxed income to be passed from one generation to another through pensions is the worst election pledge to come out of the party conference season

    We’re obviously not “all in this together” any more are we

  • 3 ermine October 4, 2014, 12:33 pm

    @Cerridwen although I’m for IHT to forestall the New Aristocracy in all fairness the lifetime allowance has been tracked down over time, along with the yearly limitation. A pension lifetime allowance of about twice the IHT limit strikes me as reasonable – as long as it’s subject to IHT after it’s served its purpose. I think a good quid pro quo would be – want to avoid your heirs paying IHT on your pension? Fine, then the max lifetime limit is the IHT limit (~600,000). There really should be a cost for featherbedding your kids which will feed straight into house prices over the generations.

  • 4 Greg October 4, 2014, 1:18 pm

    Well I certainly agree with you about IHT being an excellent tax. The average person won’t pay a penny of it anyway. It’s just more poorly thought through, populist nonsense from Gideot.

    He’s opening up new ways to avoid taxes. Surely it now makes sense to get a whopping interest-only mortgage, bung the saved repayment part into a pension, then switch to repayment as one retires? More house price pressure for people irresponsible enough to be born recently and not have a family dynasty.

    It’s not the worst election pledge even from that speech. The human rights one is.

    A disgrace.

  • 5 SemiPassive October 4, 2014, 2:18 pm

    The current govt has certainly done a lot to make pensions more tempting than previously.
    However for all the pros, a fairly brief period out of work has emphasized how 55 is a long way away when you need money to pay a mortgage. So after stopping pension contributions for that spell, I’ve decided I’m not restarting them – even though I now could – and will pay down mortgage debt in preference.

    So unlike Greg I don’t think there will be a big push by everyone to have interest only mortgages. Maybe a few optimists who think there will never be another dip in house prices, and that they will be working solidly until their chosen retirement date.

    As to my portfolio of tracker ETFs, I’m holding them and will just let the dividends roll up for now. Once the house is paid off I will revisit pension contributions, but for now my exposure to stocks and bonds is high enough as a % of net worth.

    P.S. the flip side of the Conservative plan to increase the 40% threshold to 50k (a great idea imo) is it will make pension contributions less favourable for earnings under 50k.

  • 6 PF October 4, 2014, 2:19 pm

    It’s seems to me that if a pension fund can be passed on at death, it ought, at least, to be accounted for against the recipient’s lifetime pension allowance.

  • 7 Sara October 4, 2014, 4:22 pm

    And yet, the UK public libraries have over 92 million books which you can borrow for exactly £0 per month.
    Shame we seem determined to destroy them when “of course” everyone can afford a PC and Internet access and an Amazon account and has the skills to set up and use all of the above. Never mind the dangers of putting all that control into the hands of a private business.

  • 8 Alex October 4, 2014, 4:41 pm

    1. Good news on ETFs: Vanguard has four new ETFs for us in the UK. I was particularly struck by that on the FTSE 250 Index, VMID. It has a market-leading TER of 0.10%.

    2. More good news on ETFs: investing in Japan has become cheaper, thanks to db X-trackers. They’ve reduced the TER on their Nikkei 225 offering to 0.09%. XDJP is a physical ETF.

  • 9 Charlie October 4, 2014, 5:15 pm
  • 10 ermine October 4, 2014, 7:04 pm

    @Charlie this is the same Torygraph that has heralded the end of the 25% tax-free PCLS in 2014, 2013, 2012 and probably for the 10 years before that, with their rumblings and conditional clauses? Indeed the same Torygraph that asserts the old, not the young need assistance with their mortgage, presumably because the alleged wisdom that comes with age failed to inform these people that they shouldn’t have a mortgage by the time they retire, D’oh, facepalm…

  • 11 Rajkanwar Batra October 4, 2014, 7:17 pm

    It looks like they have moved the pendulum too far the other way. From 55% tax to zero percent if the pension saver dies before the age of 75.

    Further 75 is a very arbitrary age and I don’t follow the logic of having different treatment based on the single point age at death.

    It would be better to apply a graduated limit based on number of years between 65 to 85 say making 5% taxable.

  • 12 dearieme October 4, 2014, 7:47 pm

    The trouble with IHT is that the rich can easily avoid it on most of their wealth, the spongeing classes don’t pay it anyway, and the families it hits are often middling folk with a house in a pricey area. Surely if we are going to have a wealth tax of some sort that’s about the pottiest sort you could have?

  • 13 dearieme October 4, 2014, 7:51 pm

    By the way; suppose you like spending your money on silly gee-gaws, I like spending mine on (say) education for my grandchildren. IHT means that you pay 20% VAT on your weakness, I pay 40% IHT on mine. I don’t even get credit for reducing the load on the state schools. That doesn’t sound like a sensible tax to me.

    Let’s start with a wealth tax on property owned abroad: the Tuscany tax, we could call it. Then a heavy tax on allotments and bicycles, because of the annoying preachy buggers who indulge in such things – a sort of sin tax on canting puritans.

  • 14 Lady London October 4, 2014, 11:03 pm

    I thought it was just me when I looked at all those pension changes and thought “well what a gift for the extremely wealthy”. and then “not much for the rest of us”. I am so glad to find a blog that actually understands finance.

    The other thing that occurs to me is that if inflation kicks off again the lifetime limit of £1.25m is not going to buy you much of a pension. So doubtless the government will be able to tax the unclever who need to put more in or take more out. Oh, taxing us both ways! that’ll be something new…. [sarcasm]

  • 15 Luke October 5, 2014, 9:06 am

    I love dearmie’s suggestion for a bicycle tax! 😀

  • 16 qpop October 5, 2014, 11:08 am

    I have a strong suspicion that the IHT band and the lifetime allowance limit on pensions would harmonise under a tory government.

    They’ve already mentioned they want to raise the IHT NRB to £1M, and there are clues in the finance act 2014 that £1M may well end up being the lifetime allowance.

    The main clue is in the pension recycling rules, where one of the conditions had historically related to the total PCLS in the previous year being above 1% of the LTA, which is being replaced with the figure of £10,000.

    It’s a carrot and stick approach. A £1M LTA would limit tax-relievable pensions to ~ £50,000 PA in retirement (or ~£37,500 if PCLS taken), which is neither a tiny limit nor a huge one.

    The bit I don’t get is that the 55% tax charge wasn’t plucked out of nowhere. It is supposed to take account of the fact that the contributions received tax relief (20%) and miss out on IHT (40%). £1 * 0.6 * 0.8 = £0.48, not far off the net proceeds. Taking this link away allows for all sorts of taxation arbitrage, £1M limit or no.

  • 17 vanguardfan October 5, 2014, 11:48 am

    qpop, I can see that might be a rational approach (but since when has that been the driving motivation?) EXCEPT for the issue of married vs single people. IHT threshold effectively doubles for those married at first death, whereas pensions pots are strictly individual (although now even easier to transfer to spouse on death than they were). As ever with taxes, seemingly simple rationalisations turn out to have complications!

    In general, I agree with others who feel this is a breathtakingly blatant gift to the rich to (further) avoid IHT. I rather liked Merryn Somerset Webb’s idea for IHT, that it shoudl be a tax on the recipient (presumably as income) rather than the donor. More redistributive and encourages spreading rather than concentrating inherited wealth. In fact, the death tax reforms are a bit like this (although by allowing gradual withdrawal, more tax can be avoided), so maybe its not such a blue sky idea after all.

  • 18 Hogwash October 5, 2014, 12:03 pm

    Parents should hope that their children don’t find out about the arbitrary rule of 75, otherwise those younger ones may find something, other than a tea bag, in their darjeeling. No, not sugar!
    I am now aged 76, so don’t care if my daughter reads this.

  • 19 vanguardfan October 5, 2014, 12:07 pm

    Another advantage to abolishing IHT and replacing it with a tax on gifts on the recipient is it removes at a stroke the anxiety of trying to time your PETs so that you live long enough to take them out of tax but not so long that you risk needing the money you have gifted! Only a system where the tax is the same on lifetime gifts as on inheritences can remove the need for those unnecessary contortions.

  • 20 dearieme October 5, 2014, 12:52 pm

    I suspect that “well what a gift for the extremely wealthy” and then “not much for the rest of us” may well prove to be plain wrong. The extremely wealthy probably already pay very little IHT as a proportion of their wealth, so it’s not much of a gift for them. Whereas the pension wheeze will let us, or our heirs, potentially save a few thousand, depending on what the IHT rules are when each of us dies, what our house is then worth, and how much of our wealth has vanished into “care” costs. This advantage for us may be a small price for the taxpayer to bear if it leads to more contributions to pensions.

  • 21 Neverland October 5, 2014, 1:03 pm

    We’ll the Labour Party and the Conservatives have both pretty much deserted in the middle ground

    I guess this probably means the liberal democrats will do much better than is currently expected, maybe even equal their seat count from 2010. Not because of attractiveness but because there is nowhere else to go

    However if the government is going to be another coalition I don’t think it will be formed as smoothly as the last one as the lib dems will have experienced just how unpopular they will become in government

  • 22 grey gym sock October 5, 2014, 6:49 pm

    for the very wealthy, this is useful both as 1 vehicle for reducing IHT and to reduce tax on investment income and capital gains (since income and gains in a pension are untaxed – which makes more difference if you’re wealthy enough to be a higher/additional rate taxpayer through most of your life, not just in your peak earning years, and to usually use your CGT allowance). the taxation of trusts has become much less favourable over the last few years (except perhaps for trusts set up long enough ago, or in secrecy jurisdictions, or both), so this will be a welcome alternative.

    IMHO, the problem with IHT is that it has too many exemptions; creating a new 1 makes it worse. IHT should apply directly to personal pensions. it should apply to lifetime gifts (i.e. to all gifts which are currently PETs). all of this should be at the same rate. the exemptions for agricultural land and AIM shares should be abolished. close the loopholes; keep it simple; and perhaps reduce the % rate.

  • 23 MP October 6, 2014, 9:55 am

    Hi, you state “You’ll surely have heard by now that ‘death tax’ will be abolished if the Tories win the election” – but I understood the measure is to be implemented in April, before the next general election in May 2015?

  • 24 The Investor October 6, 2014, 11:21 am

    @MP — Yes, good catch. Mental slip, fixed above.

  • 25 Meritocrat October 6, 2014, 12:33 pm

    The objection to IHT from the left-leaning middle class (I believe) is largely because they believe inheritance should be a means of redistributing wealth from their wealthy parents to less wealthy younger generations. The cold harsh reality couldn’t be further from the truth in that it simply concentrates wealth in the top 1-5%.

    IHT is seen as a double tax on the (often) earned income of the dead middle class, rather than a tax on the unearned income of the wealthy. A simple solution would be to abolish it altogether and simply tax inherited wealth at the marginal income tax rate of the beneficiary up to the threshold at 150,000, with the remainder taxed at 50%. Including gifts within 7 years of death in this allowance would close the loopholes. This could all be managed by the standard tax return, with no additional tax collection costs.

    The income generated could then be used to increase the thresholds for basic and higher rate tax on earned income and reward people for earning income.

    Taxed in this way, inheritance could actually be used as a means of reducing inequality rather than increasing it. It’ll never happen…

  • 26 kean October 7, 2014, 12:04 pm

    I am kind of baffled by some of the arguments here & it is quite possible that I do not fully understand the whole. So my bafflement laid bare …
    1) Assuming only about 1-2% in the UK are really, really rich who pay “experts” a fortune to find loopholes in order to avoid IHT, the impending pension related tax can benefit at least 40-50% of the population who have enough but no quite to pay expert tax planners who perhaps stand to benefit from this. In this country we are obsessed with rich getting richer but may be that is the price we have to pay sometimes. Nose to spite face springs to mind.
    2) Think we all know that rich like spending especially their inherited fortune. Surely if only 30-50% of that spend is in this country then that boosts UK economy which in turn job market. 😉 what’s wrong with that?
    3) I class myself as mid-middle class and am desperate to know that my dependents (especially one disabled) will benefit from my accumulated wealth such as it is! If that means that 10-15% of wealthy also benefit then so be it 🙂
    4) If the consequential outcome is that state employees of whatever government agencies start moving to Defined Contribution Pension hence reducing tax payer burden then I can only say hooray!
    5) If pension contributions generally increase as a consequence then less burden on the state and therefore more to go around the bottom 10-20% social strata.
    6) Agree that inherited pension pot should form part of the inheritors Life Time Limit.

    No doubt like anything in life radical shift of this nature means a %age loose out but on the whole this seems like a good change to me. So what am I missing here?

  • 27 grey gym sock October 7, 2014, 7:16 pm

    kean, let me just make a few practical points, while trying to avoid going too far into the politics …

    if you wanted to reduce IHT for the moderately well-off, without a massive give-away to the extremely wealthy, then you could
    (a) raise the exempt amount (from £325k); or
    (b) have several IHT bands, starting at less than 40%, and rising to 40% or higher.

    introducing new loopholes is an inefficient way to give money to the moderately well-off, because the extremely wealthy beneifit to a much greater extent. we already have this problem: there are too many loopholes, so the wealthiest pay little IHT. there is an alternative: close the loopholes. it is not inevitable that using expensive tax advisers can get out of of paying IHT; it’s a consequence of a (perhaps deliberately) badly designed tax.

    if your aim is to give ppl money in the hope that they will spend it, then you should give it to poorer ppl, or failing that middling well-off ppl, and definitely not the richest. because although everybody tends to spend a bit more as they get more money, but the proportion of the extra money that they spend falls as their wealth rises. so give-aways to the rich are an incredibly ineffective way of boosting the economy. in fact, this is probably 1 reason why the economy is recovering so slowly: it’s only the incomes of richer ppl which have been rising in real terms, so little of that has been spent.

    a tax give-away, mostly to the rich and a bit to the middle, is going to do more-or-less nothing to reduce claims on means-tested benefits.

    finally, a tax reduction is not automatically a good thing just because it involves paying less tax. you first have to explain why it wouldn’t be better to cut some other tax instead, or to raise (or refrain from cutting) public spending, or to reduce the deficit. i think you have a rather difficult case explaining why a tax cut focused on the richest is the best use of the money.

  • 28 kean October 8, 2014, 8:26 am

    @ggs, accept most of your comments; and, my mistake should have said I was reflecting mainly on the impending pension changes.

    It all gets quite murky if I start thinking about motivation of any politicians (whatever colours on their mast) in proposing any radical change. You are right, if the real motivation was to spread the country’s wealth/ease the burden on 80% of the population then there are many different ways that the politicians could sliced & diced this.
    I am kind of resigned to the fact that there is no such thing as a conviction politician any more; whatever their colours, they are all motivated by career ambitions & survival (ie. get in & stay in office!). I find that thought quite scary!
    Against that backdrop, I tend to accept something like the proposed pension change as best we are going to get then I’ll take it.

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