In addition, if you have a defined contribution pension, or a SIPP, that is currently outside of probate and potential inheritance tax, Rachel the grave robber’s proposed rule changes, due in two years, will mean access to your remaining pension fund will be denied to the survivor until this complex addition to probate has been resolved. In my case, my wife would lose my pip, the car, state pension, access to my pension adding to the stresses of bereavement. Brutal and preparation for such an event is essential, imho. Not just the farmers being shafted.
I’d like to think that I’m pretty clued up on financial matters, especially pensions (having been a trustee of a major pension scheme as one of my many past roles) but even I had missed some of the details of these proposed changes. My financial advisor visited last week and told me that I have a potential future problem that I was unaware of (or, rather, my estate would).
As you say, remaining funds in defined contribution pensions will, in 2 years time, be included in inheritance tax calculations whereas, at present, they are excluded. It’s worth stating that this only matters if your total estate at death exceeds £1m (if you are married and a home owner), but with house prices in the south being as they are this will now catch millions of people. Thankfully, I also have a defined benefit pension which my wife will be able to live comfortably on (she’d get two-thirds of it) and these are still excluded, but my kids (who would get the remaining defined contribution fund) would have to pay both inheritance tax and income tax on this when we both pop our clogs, which is deeply unfair.
My financial advisor said not to panic yet as it’s 2 years away and the pensions industry is lobbying government to say that this is unjust and will deter future generations from saving for retirement but, if all else fails, he reckons there will be some ‘work arounds’ by then, as there are with many of these issues. For example, we have set up a ‘life interest trust’ to avoid our house being used to fund potential future care costs. I would be the first to admit though that it’s not right that only those who can afford specialist financial advice can work around these issues. Those who can’t, who often have the greater need, sleepwalk in to these financial traps, and that just doesn’t sit comfortably with me.