September 17, 2025 • 23 mins
Merryn Somerset Webb sits down with Mark Wood, Chairman of Everest Funeral Concierge, Chair of PensionBee, and former CEO off Prudential UK and AXA, to discuss how sweeping pension reforms could transform the way UK earners save and draw down their pensions.
Update: We wanted to add clarification to a point made in the show. In the interview, it was suggested that taking your 25% tax-free lump sum at age 55 or later means you’ve “retired” and can no longer put money into your pension with tax relief. It is correct that from the normal minimum pension age (currently 55, rising to 57 in 2028), you can access up to 25% of your pension pot tax-free. The restriction only arises if you also start taking taxable income (for example, via drawdown or as a lump sum payment). At that point, the Money Purchase Annual Allowance (MPAA) rules apply, and your future tax-relievable contributions are capped at £10,000 per year (current rules). However, withdrawing this lump sum alone does not mean you are treated as retired. You can continue to contribute to your pension and receive tax relief on those contributions, subject to the standard annual allowance.
Thanks as always to those who wrote in seeking clarification.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Hey, Maren Talks Money listeners.
Speaker 2 (00:01):
We put this pot out earlier in the week, and
some of our listeners wrote in, thanks very much for
doing that, by the way, to tell us that they
felt that some bits of it were unclear and they
wanted some clarification around part of the podcast. So there
is something that comes up later in this podcast that
I just want to add a little more detail and
nuance to. Right now, we talk to our expert Mark
(00:22):
Word about everything around with drawing your tax free amount
from your pension fund, but there was one bit that
wasn't as clear as I would have liked it to be.
Speaker 1 (00:31):
Some listeners have written in and said, is this right?
Is this wrong?
Speaker 2 (00:34):
So I just want to clarify exactly what we were
talking about what we said in the interview. Sorry, what
our guest said in the interview was that if you
take your twenty five percent tax freelump summerday age fifty
five or later, you've effectively retired and you can no
longer put money into your pension with tax relief. That
is not exactly right. There is nuance in there from
(00:56):
the minimum pension age you can take what it's not
actually twenty five anymore. As the amount that used to
be twenty five percent of your pension pot tax free,
but also start taking taxable income from that pension fund
as another lump sum payment or as a drawdown of
some kind. At that point the money purchase annual allowance
the MPAA rules apply, and after that you can only
(01:19):
put in ten thousand pounds a year. So the key
point is simply withdrawing the lump sum does not mean
that you are treated as retards. You can continue to
contribute and get tax relief after that. It's only when
you start taking more income that MPAA clicks in.
Speaker 1 (01:37):
So complicated but important.
Speaker 2 (01:40):
We just wanted to clarify that, and thank you so
much to all those listeners who wrote.
Speaker 3 (01:44):
In asking for that clarification.
Speaker 1 (01:46):
We really appreciate it.
Speaker 2 (01:47):
Please do write in and let us know every time
something doesn't seem quite right or developed enough for you.
Speaker 4 (01:57):
Bloomberg Audio Studios podcast US Radio News.
Speaker 2 (02:11):
Welcome to Merin Talks Your Money, the personal finance edition
of Merin Talks Money. In these episodes, we talk about
the best strategies for making the most of your money.
I'm marrying something set Web and this week I want
to talk about something that I think will affect an
awful lot of our listeners a major policy shift from
the government around tax. Now grieving families, rather than pension providers,
(02:33):
are about to be responsible for calculating and paying inheritance
tax on unused pension pots. And that's you, of course,
the idea that you're going to pay inheritance tax on
your unused pension pot when you die. So if you
die now after the age of seventy five, beneficiaries will
probably also face income tax, and there is potential in
here for you to end up paying a marginal tax
(02:55):
rate of sixty seven percent on pension pots after the
death everever held that pot in the first place.
Speaker 3 (03:02):
That sounds complicated.
Speaker 2 (03:04):
Maybe it is tablets makes sense of all this. I've
got with me today, Mark Wood, chairman of Everest Funeral Concierge.
Speaker 3 (03:09):
Mark is also the pharmacy.
Speaker 2 (03:11):
Of Prudential and the current chair of Pension b So
no one knows more about pensions than Mark.
Speaker 3 (03:17):
Mark. Thank you for being with us today. I pleasure
now listen.
Speaker 2 (03:21):
I think I made that will sound more complicated than
I needed to in the introduction. Just explain exactly what
these huge changes are.
Speaker 5 (03:28):
Well, I think We've got to go back a decade
to George Osborne being Chancellor and the changes that he
made in the twenty fourteen twenty fifteen Budget and Finance Act,
which really revolutionized the tax position of pensions and moved
pensions from being something that broadly speaking, either you pay
(03:50):
inheritance tax on your defined contribution pension pot or you
lose all the money from your defined benefit pots. So
what he did was to remove this concept of compulsory
and utization at the age of seventy five, so that
people could have an asset in terms of the money
that had accumulated for their pensures that they could then
transfer on to their beneficiaries without inheritance sax. It became
(04:16):
an anomaly within the assets that somebody has when and
they eventually die. The oragial reeves change reverses all of that, and,
as you say, puts the onus on those people left behind,
the grieving families at a time when really nobody's equipped
to think about the complexities of probate and all of
(04:36):
the dreadful administration that comes particularly with unexpected death. And
these changes hit hardest for those that die before the
age of seventy five, which these days is dying young.
Speaker 2 (04:49):
That's true, Mark, Can I just take you back a
little bit to how it was before. So there was
a stage pre Osborne, as you say, whereas you had
your pension pop built up and your defined contribution pot,
your set whatever whatever it was, and then when you
came to retirement age, the only way you could draw
that money unless you could prefer There was quite a
strict group of conditions that meant that you could do
it differently, but in the main you had to take
(05:11):
that large parle of money and pay for an annuity
which gave you a regular stream of income forever. And
the innuity market was a mess. Older people might remember
that it was a massive exploitation and conflict of interest
and all sorts of things, wasn't it. And so when
George osbyne Osborne did this, it was an absolute revolution
for pensions. And it effectively made the pension pot into
(05:34):
a family trust because you could pass it down generationally
without paying any inheritance tax at all, and you could
hold it inside the trust and simply draw income from
it as and when. So if you had a low income,
you could draw money from it and then you would
be paying either no or a very low level of
income tax on it. If you had a higher rate
of income tax, maybe you you'd hold off on drawing
(05:54):
money from it. So it effectively, after all these years
of climping down on trusts and ways for people to
avoid taxation via the trust system, this produced a whole
new system for allowing people to pass large amounts of
money down for the generations. Right, And we kept looking
at it and saying that's nuts. At some point, at
some point someone's going to go, well, hang on a
(06:15):
tech here that's got to be liable for inheritance tax,
and oh, here we are right.
Speaker 5 (06:20):
And it was even more dramatic than that because the
focus previously had been on age seventy five. What happened
under this change was that from the age of fifty
five you could start drawing on your pensions so you
could carry on working. You had accumulated your pension pop.
You could then begin to take money out of your
pension book and maybe pass it to the next generation,
(06:40):
taking advantage of what was the seven year rule for
inheritance tax. So it gave huge personal financial flexibility over
what is you know, for the vast majority of people,
their largest or their second, you know, with the family
home their largest or their second largest asset.
Speaker 3 (06:57):
And this then.
Speaker 2 (06:58):
Created the incentive for people to pour it as much
money into pensions as possible. And when we were giving
people ideas about how to manage their money, we would
say to them, do you know what, spend everything else? First,
spend the ives, spend everything you have outside of it,
and protect that pension at all costs because that is
going to your heirs HT three hooray.
Speaker 5 (07:17):
Yeah. And of course we had the growth of the
equity release market as a consequence, with people taking money
out of their residential property and as you say, keeping
the pension pot protected what they drew money from elsewhere.
Speaker 3 (07:29):
Yeah.
Speaker 2 (07:30):
And now what we're saying is that I've just been
looking at some chance is we are seeing exactly the opposite.
We are seeing a rush to get money as quickly
as you can out of pension. So the number of
people drawing, the amount of money that you're allowed to
take out of your pension tax free, which used to
be twenty five percent of your pot you could take
out tax free when you hit retirement age, and now
it's a maximum of two hundred and sixty eight thousand,
(07:51):
two hundred and seventy five pounds is a maximum you
can take out now and less, by the way, and
you will know more about this than I do, MRK.
Unless you have one of them any many fixed protections
for our rich older people who always seem to have
some kind of protection or the other. If you have
there's one particularly good protection. If you have it, you
can take out over six hundred thousand pounds tax free.
(08:13):
Well done those of you who have that exemption. We
don't really like you, but you know there it is.
Speaker 5 (08:18):
There's another wrinkle that's coming here, which is the looming
threat that that tax free withdrawal that you've just been
talking about also gets taken away.
Speaker 2 (08:29):
Oh just why everyone is rushing to do it now?
And if you look at the charts of this amount
of money being withdrawn, you can see this exponential rise
over the last eighteen months or so of people just going,
do you know what? I want it out of that
wrapper and in my control. I'm no longer interested in
the tax benefits of holding money inside a pension. I
just want it under my control, although of course they'll
(08:50):
be sorry if it turns out one of the things
I'm produced in the next budget is a wealth tax
that excludes pensions to another conversation, indeed.
Speaker 5 (08:57):
But I think and also we've just got to I mean,
you were taking people back to a previous period. And
of course, in the previous period, many, many, many people
relied on their occupational pension schemes. They're so called define
benefit pension schemes. And another of the consequences of the
Osborne budgets pension changes is that people took what were
(09:20):
described as enhanced transfer values, taking money out of their
occupational pension scheme and putting it into a SIP. And
of course the logic for doing that was that the
defined benefit pension plan is a little bit like the
annuity that you were previously forced to purchase. It expired
with you, whereas if you held money in the defined
(09:41):
contribution pot, that was an asset as you say, that
you can then take and use with your family, your
family can inherit, etc. Etc. All of that now, so
all of the considerations around the tax planning that people
had been so careful about over the last decade now
needs completely rewriting.
Speaker 2 (09:57):
Yeah, so this comes in, So let's talk about what
planned now By Rachel Reeves who may or may not
still be in post when these changes come in, which
is at the moment moved to be April twenty twenty seven, right,
And so from from that date, if you die older
than seventy five, it's different for under seventy five, isn't it.
(10:17):
So we'll come back to that. Over seventy five, that
pension pot is then liable for inheritance tax. And then
once you start to draw from that pension pot, the
money that you draw out as the air will also
be liable for income tax. So when we talk about
a possible rate of sixty seven percent, we're talking about
(10:38):
forty percent inheritance tax paid first, followed by paying the
higher rate of income tax.
Speaker 5 (10:44):
Is that right correct?
Speaker 2 (10:45):
Okay, doesn't seem to be much you can do about that.
Speaker 5 (10:48):
I guess it's kind of the reverse of what you
were just describing, you know, rather than leave all the
money in the pension pot, you know, maybe we're going
to see advisers now talking about taking all the money
out of the pension pod. But the difficut is, how
do you create a tax free income stream from the
pot that somebody has bequeathed over the age of seventy
five So I guess you know SIPs would be ices
(11:12):
rather would be an option where you could build up
an amount. But you know, it's that there are caps
to the amount that you can put in for most
pension pots of any size, that would be insufficient. But
looking at a way to shelter that money otherwise is tricky.
That I mean, some advisers are talking about putting insurance
(11:33):
in place to cover the inheritance tax obligations of shifting
the pot early, so now have to look at a
ten year runway in terms of making gifts to beneficiaries.
But that element of inheritance tax planning, how do you
give money away so that it doesn't get into probate
and doesn't become acid and the family don't have to
(11:53):
worry about the inheritance tax. That's gaining huge traction with
financial advisors and pretty much annual review now is having
to take account of age, wealth, beneficiaries and the current
arrangements that are put in place by the will and
how them modifying.
Speaker 2 (12:12):
Yeah, I mean, the obvious immediate thing to do is
to take that twenty five percent up to the highest
amount that you can and to give it straight to
your kids, assuming you can afford to do that.
Speaker 5 (12:20):
Yeah, it's such an unusual benefit. It's I mean, it's
it's politically very difficult to do. I mean, along with
the triple lock. It's been a statement of faith the
governments for a long period of time. But it is
an anomaly in the tax regime in that you get
tax really on the way in, and for this amount
of money, you get tax really from the way out.
Speaker 2 (12:40):
Whereas I says, of course, so the opposite, you get
no tax relief on the way in, but you get
it all on the way out.
Speaker 3 (12:45):
And that makes sense.
Speaker 2 (12:46):
And when we look at pensions, we think of it
as being tax relief on the way in and nothing
on the way out.
Speaker 3 (12:50):
But of course there is hidden away.
Speaker 2 (12:52):
There's twenty five percent or two hundred and sixty two
hundred and seventy five pounds, which is tax relief on
the way in and the way out. That's great, that's
the great incentive of pensions. Without that, and without ageterially,
if it's hard to see how anyone would be incentivized
to save anything beyond the minimum of their auto enrollment
contributions into a pension, Yes.
Speaker 5 (13:13):
I mean they were. I think we've seen quite a
lot of research recently. I think we have Pension be
just published on research showing just how small people's pension
pots are. So there's a delicate balance there. There is
a trap, of course that people have got to be
aware of with the tax free s, the current rules
allowing you to take the tax free some from the
age of fifty five. So yeah, it's quite tempting, you know,
(13:33):
if you're fifty six, fifty seven to fifty eight and
you see this looming change, it's quite tempting to take
that money out straight away. But if you do that,
from a text point of view, you have retired and
therefore you can't put any further money into the basket
that you'll get tax relief on as the money goes in.
So it's it requires a careful calculation. You need to
(13:56):
be confident that the pot, the residual pot, is sufficient
for what you're requs are likely to be when you
eventually cease early.
Speaker 2 (14:04):
Right, Okay, good, good point, good trap information. Can I
just ask you to explain what's different when you're under
seventy five.
Speaker 3 (14:16):
But I'll tell you what I think it is.
Speaker 2 (14:18):
I think under seventy five, I think it would still
be liable for HT, but it is not liable for
income tax because under the old rules, under the old rules,
if you died before seventy five, that that pension could
then simply break and you would receive the entire amount
tax free, or you could withdraw from it tax free,
which was really fairly extraordinary. I mean, that really is
no tax on the way and no tax on the
(14:39):
way out, whereas if you were over seventy five previously
you were, you did have to pay the income tax
on it. So that that's the difference. That's I just
wonder why you didn't know the answer to that one.
Speaker 3 (14:51):
Fascinating? Do I get that right?
Speaker 5 (14:53):
Then? Yeah?
Speaker 3 (14:53):
Yeah, okay, good, okay.
Speaker 2 (14:56):
And then the other thing that I wanted to ask
a little more detail on is this idea of taking
out insurance.
Speaker 1 (15:01):
How does that work?
Speaker 5 (15:02):
So the tricky decision is knowing when you're going to die.
So death is certain, but the date of your death
is not certain, and so looking forward and planning, you
know the cashloads are required to keep you in whatever
style of life you want to be kept in for
your life. How much of the pot is then left
(15:23):
over and how much can you afford to gift away.
So there are a bunch of different thresholds for gifts.
You know, if you've got a child or a grandchild,
getting married, you get the five thousand pounds allowance for
a wedding gift. On the birth of a child or grandchild,
there's a three thousand pounds allowance, says the annual occasional
(15:45):
gifts of two hundred and fifty pounds. A whole labyrinth
and there's a very good government website that covers all
that stuff. But the big one is how do you
make gifts that will not impact your lifestyle? Very important
to write a letter to the beneficiary saying, dear beneficiary,
(16:05):
I'm giving you five pounds, please rest and sure this
is going to have no impact on my standard of
living because that's the tax trigger. Yes, so you make
that clarification in the letter that accompanies the check or
the bank transfer. But then once that money has gone across,
you've got to survive for a period of time. So
there's a graduated declining tax liability. Currently over seven years.
(16:30):
It seemed to be over ten years where there's residual tax.
So in order to avoid so let's imagine that somebody
pays off their mortgage, or they know, they pay school fees,
or they buy a car or whatever, you know, some
capital amount. They then don't have the cash to pay
the tax that would happen if the person giving the
(16:51):
money dies in three years or four years. So the
prudent thing that many financial advisors would suggest that the
person giving the gift is to take it at declining
value of insurance out over the residual period, so that
when the you know, in the unlikely of then something
horrible happens and you've got the tax liability, crystallize the
insurance policy. Phase it wrong. You have to find the.
Speaker 3 (17:13):
Cash, okay.
Speaker 2 (17:15):
So basically you're taking insurance on money that you have
handed over early. There isn't really a way to take
out insurance if you haven't gifted money.
Speaker 3 (17:25):
That would make no sense.
Speaker 5 (17:26):
That's right, okay?
Speaker 2 (17:28):
And can I just take you back to gifts out
of gifts.
Speaker 3 (17:30):
Out of income.
Speaker 2 (17:31):
I thought that there was not a tax liability on
regular gifts out of income that did not affect your
standard of living.
Speaker 5 (17:36):
No, there isn't, there is it?
Speaker 3 (17:38):
Okay? Yeah, I just wanted to clarify that.
Speaker 5 (17:40):
I mean, the reason I make the point about the
the clarification is that if you're making a gift of
some substance and your estate is opened up, it's very
helpful for the person to receive the money to have
that the letter.
Speaker 2 (17:57):
Yeah, but those gifts have to be regular, don't they.
Isn't that the idea. You can't just give a lump salmon.
Call it a gift out of income.
Speaker 5 (18:05):
The classic way in which the So let's imagine that
somebody's got five grandchildren and they're helping with the school fees.
That's going to amount to quite a big amount of money, yes,
for that individual, but it can be affordable and it
can be regular. But it's worth just jotting down in
a note. You know, I'm paying this, but it's not
(18:26):
having an impact.
Speaker 3 (18:27):
Okay, understood, thank you. Okay. Now let's say that I'm.
Speaker 2 (18:32):
Looking at all this and I'm looking at Rachel Reeves
and I'm looking at Kirstarma, and I'm thinking for myself, gosh,
you know, maybe he would go, maybe she would go.
Maybe there might be something even more left wing put
in place. Maybe my tax is going to go up
more and more and more. And I'm kind of over
this whole thing. So I am going to move to
Milan with all the other rich people, and I'm going
to go there and carry on with a bidding up
(18:54):
of house prices so that local people can't afford to buy.
You know, the usual dynamic, right, the usual dynamic. As
someone puts in place something to attract rich people, rich
people come, they price out ordinary people, and then ten
years later they reverse the rules on the rich people.
But here we are, We're going to Milan where their
rules are still in plaze. I only have to pay
I think it's two hundred thousand dollars a undred thousand
years two hundred thousand years a year flat rate, however
(19:15):
high my income.
Speaker 3 (19:16):
So I'm all over.
Speaker 2 (19:17):
That I had to Milana buy myself a nice penthouse
flat and maybe a nice townhouse.
Speaker 3 (19:21):
I don't know. I think i'd prefer townhouse personally, but
you may prefer flat.
Speaker 2 (19:25):
How long How long do I have to worry that
they're still gonna come after my pension?
Speaker 5 (19:31):
Well quite quite a long time. And I think he's
the answer. We do, of course, have the reverse situation,
which is that Nigel Farne gets into power and, as
he announced a couple of days ago, alleviates the whole
burden of inheritance tax, which means that you've paid for
your international removal firm and you've brought your ferrari out
of me mistakenly because actually actually it makes a lot
(19:54):
more sense now to be paying five percent on assets
over three million pounds or whatever it is, and suddenly
your farm may be tax free rather than taxed without
business roll over relief and inaccessible a million pounds. So
it's the planning right now in this period of incredible
(20:15):
turbulence politically, I think is incredibly difficult, and of course
the upheaval of you know, I mean, there are people
clearly who are mobile internationally, and London has been a
relatively safe and that maybe people's judgment, so that's changing
after the weekend, a relatively safe place to live. Traditionally
(20:36):
we've been regarded as having a relatively stable government. Again,
that few baby changing. So there are mobile people who
will move. As you suggest that Dubai as a particularly
attractive offer of at the moment, I think as well.
And of course you can go to Spain as many
people have for many years, and agree a cap on
your liabilities.
Speaker 2 (20:56):
Okay, well let's say I head off, I head off
to Spain or Italy or whatever. Before I go, Before
I go, I give each of these grandchildren of mine,
not a gift out of income, but a lump sum
of a quarter of a million quid each, and then
I'm off.
Speaker 3 (21:08):
They're on their own. I've given them the money. We're
all done here.
Speaker 2 (21:11):
Amas six months later, you know, while gloating about something
or the other, I have a heart attack.
Speaker 3 (21:16):
I'm off, I'm gone.
Speaker 2 (21:18):
Will those heirs be here with inheritance attack?
Speaker 5 (21:22):
Yeah, and they will. And the whole process of probat
And as you said right at the beginning of this conversation,
the obligation to pay the tax falls on the beneficiaries,
and they're accounting for those receipts will be as if
the move never took place. So the excess re offer
that's caused the cardiac arrest will create a new burden
(21:42):
on people that thought that their life was run throughly simple.
Speaker 2 (21:46):
Okay, all right, so here we are. I think we've
been through all of it. So let me ask you
one last question, mark, have you taken your lump freysome?
Speaker 5 (21:53):
Oh? Definitely, long ago, long ago. I took my tax
free lumps off on my fifty fifth birthday at the maximum.
Speaker 2 (22:04):
Interesting, But what do you do with it then, because
then you've got you take it out of the investment
portfolio that it's in. Suddenly you've got money that is
now subject to income tax in capital gains tax, which
might require this is probably a longer podcast, but possibly
requires a slightly different type of portfolio to one where
everything at cruise tax free.
Speaker 5 (22:23):
Right, yeah, I mean it depends entirely on an individual's
asset mix and the opportunities that an individual has got to.
In my case, I was setting up a new business,
opening up a new insurance company, so it was an
obvious thing to create an amount of capital that was available.
But you know, everybody's circumstances are different, particularly as they
(22:47):
reached that stage in their careers.
Speaker 2 (22:49):
All right, brilliant Mark, Thank you. I strongly suspect this
is a topic we are going to come back to
again and again and again, but thank you for explaining it.
Speaker 3 (22:56):
Also clearly we appreciate it.
Speaker 5 (22:57):
Well, what if I've passed the test to do, feel
free to come back to me.
Speaker 2 (23:01):
Thank you, thanks for listening to this week's Maren Talk
to Your Money. If you like our show, rate review
and subscribe wherever you listen to. Podcasts also be shored.
Follow me and John on ex or Twitter at marinasw
and John Underscore STEPIC. This episode was produced by Samasadi
and Moses and production support and sound designed by Blake
(23:23):
Mabels and Kelly Gary.
Speaker 3 (23:25):
Questions and comments on.
Speaker 2 (23:26):
This show and all our shows always welcome. Our show
email is Merrin Money at Bloomberg dot net
Hey, Maren Talks Money listeners.
Speaker 2 (00:01):
We put this pot out earlier in the week, and
some of our listeners wrote in, thanks very much for
doing that, by the way, to tell us that they
felt that some bits of it were unclear and they
wanted some clarification around part of the podcast. So there
is something that comes up later in this podcast that
I just want to add a little more detail and
nuance to. Right now, we talk to our expert Mark
(00:22):
Word about everything around with drawing your tax free amount
from your pension fund, but there was one bit that
wasn't as clear as I would have liked it to be.
Speaker 1 (00:31):
Some listeners have written in and said, is this right?
Is this wrong?
Speaker 2 (00:34):
So I just want to clarify exactly what we were
talking about what we said in the interview. Sorry, what
our guest said in the interview was that if you
take your twenty five percent tax freelump summerday age fifty
five or later, you've effectively retired and you can no
longer put money into your pension with tax relief. That
is not exactly right. There is nuance in there from
(00:56):
the minimum pension age you can take what it's not
actually twenty five anymore. As the amount that used to
be twenty five percent of your pension pot tax free,
but also start taking taxable income from that pension fund
as another lump sum payment or as a drawdown of
some kind. At that point the money purchase annual allowance
the MPAA rules apply, and after that you can only
(01:19):
put in ten thousand pounds a year. So the key
point is simply withdrawing the lump sum does not mean
that you are treated as retards. You can continue to
contribute and get tax relief after that. It's only when
you start taking more income that MPAA clicks in.
Speaker 1 (01:37):
So complicated but important.
Speaker 2 (01:40):
We just wanted to clarify that, and thank you so
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Speaker 3 (01:44):
In asking for that clarification.
Speaker 1 (01:46):
We really appreciate it.
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Please do write in and let us know every time
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Speaker 4 (01:57):
Bloomberg Audio Studios podcast US Radio News.
Speaker 2 (02:11):
Welcome to Merin Talks Your Money, the personal finance edition
of Merin Talks Money. In these episodes, we talk about
the best strategies for making the most of your money.
I'm marrying something set Web and this week I want
to talk about something that I think will affect an
awful lot of our listeners a major policy shift from
the government around tax. Now grieving families, rather than pension providers,
(02:33):
are about to be responsible for calculating and paying inheritance
tax on unused pension pots. And that's you, of course,
the idea that you're going to pay inheritance tax on
your unused pension pot when you die. So if you
die now after the age of seventy five, beneficiaries will
probably also face income tax, and there is potential in
here for you to end up paying a marginal tax
(02:55):
rate of sixty seven percent on pension pots after the
death everever held that pot in the first place.
Speaker 3 (03:02):
That sounds complicated.
Speaker 2 (03:04):
Maybe it is tablets makes sense of all this. I've
got with me today, Mark Wood, chairman of Everest Funeral Concierge.
Speaker 3 (03:09):
Mark is also the pharmacy.
Speaker 2 (03:11):
Of Prudential and the current chair of Pension b So
no one knows more about pensions than Mark.
Speaker 3 (03:17):
Mark. Thank you for being with us today. I pleasure
now listen.
Speaker 2 (03:21):
I think I made that will sound more complicated than
I needed to in the introduction. Just explain exactly what
these huge changes are.
Speaker 5 (03:28):
Well, I think We've got to go back a decade
to George Osborne being Chancellor and the changes that he
made in the twenty fourteen twenty fifteen Budget and Finance Act,
which really revolutionized the tax position of pensions and moved
pensions from being something that broadly speaking, either you pay
(03:50):
inheritance tax on your defined contribution pension pot or you
lose all the money from your defined benefit pots. So
what he did was to remove this concept of compulsory
and utization at the age of seventy five, so that
people could have an asset in terms of the money
that had accumulated for their pensures that they could then
transfer on to their beneficiaries without inheritance sax. It became
(04:16):
an anomaly within the assets that somebody has when and
they eventually die. The oragial reeves change reverses all of that, and,
as you say, puts the onus on those people left behind,
the grieving families at a time when really nobody's equipped
to think about the complexities of probate and all of
(04:36):
the dreadful administration that comes particularly with unexpected death. And
these changes hit hardest for those that die before the
age of seventy five, which these days is dying young.
Speaker 2 (04:49):
That's true, Mark, Can I just take you back a
little bit to how it was before. So there was
a stage pre Osborne, as you say, whereas you had
your pension pop built up and your defined contribution pot,
your set whatever whatever it was, and then when you
came to retirement age, the only way you could draw
that money unless you could prefer There was quite a
strict group of conditions that meant that you could do
it differently, but in the main you had to take
(05:11):
that large parle of money and pay for an annuity
which gave you a regular stream of income forever. And
the innuity market was a mess. Older people might remember
that it was a massive exploitation and conflict of interest
and all sorts of things, wasn't it. And so when
George osbyne Osborne did this, it was an absolute revolution
for pensions. And it effectively made the pension pot into
(05:34):
a family trust because you could pass it down generationally
without paying any inheritance tax at all, and you could
hold it inside the trust and simply draw income from
it as and when. So if you had a low income,
you could draw money from it and then you would
be paying either no or a very low level of
income tax on it. If you had a higher rate
of income tax, maybe you you'd hold off on drawing
(05:54):
money from it. So it effectively, after all these years
of climping down on trusts and ways for people to
avoid taxation via the trust system, this produced a whole
new system for allowing people to pass large amounts of
money down for the generations. Right, And we kept looking
at it and saying that's nuts. At some point, at
some point someone's going to go, well, hang on a
(06:15):
tech here that's got to be liable for inheritance tax,
and oh, here we are right.
Speaker 5 (06:20):
And it was even more dramatic than that because the
focus previously had been on age seventy five. What happened
under this change was that from the age of fifty
five you could start drawing on your pensions so you
could carry on working. You had accumulated your pension pop.
You could then begin to take money out of your
pension book and maybe pass it to the next generation,
(06:40):
taking advantage of what was the seven year rule for
inheritance tax. So it gave huge personal financial flexibility over
what is you know, for the vast majority of people,
their largest or their second, you know, with the family
home their largest or their second largest asset.
Speaker 3 (06:57):
And this then.
Speaker 2 (06:58):
Created the incentive for people to pour it as much
money into pensions as possible. And when we were giving
people ideas about how to manage their money, we would
say to them, do you know what, spend everything else? First,
spend the ives, spend everything you have outside of it,
and protect that pension at all costs because that is
going to your heirs HT three hooray.
Speaker 5 (07:17):
Yeah. And of course we had the growth of the
equity release market as a consequence, with people taking money
out of their residential property and as you say, keeping
the pension pot protected what they drew money from elsewhere.
Speaker 3 (07:29):
Yeah.
Speaker 2 (07:30):
And now what we're saying is that I've just been
looking at some chance is we are seeing exactly the opposite.
We are seeing a rush to get money as quickly
as you can out of pension. So the number of
people drawing, the amount of money that you're allowed to
take out of your pension tax free, which used to
be twenty five percent of your pot you could take
out tax free when you hit retirement age, and now
it's a maximum of two hundred and sixty eight thousand,
(07:51):
two hundred and seventy five pounds is a maximum you
can take out now and less, by the way, and
you will know more about this than I do, MRK.
Unless you have one of them any many fixed protections
for our rich older people who always seem to have
some kind of protection or the other. If you have
there's one particularly good protection. If you have it, you
can take out over six hundred thousand pounds tax free.
(08:13):
Well done those of you who have that exemption. We
don't really like you, but you know there it is.
Speaker 5 (08:18):
There's another wrinkle that's coming here, which is the looming
threat that that tax free withdrawal that you've just been
talking about also gets taken away.
Speaker 2 (08:29):
Oh just why everyone is rushing to do it now?
And if you look at the charts of this amount
of money being withdrawn, you can see this exponential rise
over the last eighteen months or so of people just going,
do you know what? I want it out of that
wrapper and in my control. I'm no longer interested in
the tax benefits of holding money inside a pension. I
just want it under my control, although of course they'll
(08:50):
be sorry if it turns out one of the things
I'm produced in the next budget is a wealth tax
that excludes pensions to another conversation, indeed.
Speaker 5 (08:57):
But I think and also we've just got to I mean,
you were taking people back to a previous period. And
of course, in the previous period, many, many, many people
relied on their occupational pension schemes. They're so called define
benefit pension schemes. And another of the consequences of the
Osborne budgets pension changes is that people took what were
(09:20):
described as enhanced transfer values, taking money out of their
occupational pension scheme and putting it into a SIP. And
of course the logic for doing that was that the
defined benefit pension plan is a little bit like the
annuity that you were previously forced to purchase. It expired
with you, whereas if you held money in the defined
(09:41):
contribution pot, that was an asset as you say, that
you can then take and use with your family, your
family can inherit, etc. Etc. All of that now, so
all of the considerations around the tax planning that people
had been so careful about over the last decade now
needs completely rewriting.
Speaker 2 (09:57):
Yeah, so this comes in, So let's talk about what
planned now By Rachel Reeves who may or may not
still be in post when these changes come in, which
is at the moment moved to be April twenty twenty seven, right,
And so from from that date, if you die older
than seventy five, it's different for under seventy five, isn't it.
(10:17):
So we'll come back to that. Over seventy five, that
pension pot is then liable for inheritance tax. And then
once you start to draw from that pension pot, the
money that you draw out as the air will also
be liable for income tax. So when we talk about
a possible rate of sixty seven percent, we're talking about
(10:38):
forty percent inheritance tax paid first, followed by paying the
higher rate of income tax.
Speaker 5 (10:44):
Is that right correct?
Speaker 2 (10:45):
Okay, doesn't seem to be much you can do about that.
Speaker 5 (10:48):
I guess it's kind of the reverse of what you
were just describing, you know, rather than leave all the
money in the pension pot, you know, maybe we're going
to see advisers now talking about taking all the money
out of the pension pod. But the difficut is, how
do you create a tax free income stream from the
pot that somebody has bequeathed over the age of seventy
five So I guess you know SIPs would be ices
(11:12):
rather would be an option where you could build up
an amount. But you know, it's that there are caps
to the amount that you can put in for most
pension pots of any size, that would be insufficient. But
looking at a way to shelter that money otherwise is tricky.
That I mean, some advisers are talking about putting insurance
(11:33):
in place to cover the inheritance tax obligations of shifting
the pot early, so now have to look at a
ten year runway in terms of making gifts to beneficiaries.
But that element of inheritance tax planning, how do you
give money away so that it doesn't get into probate
and doesn't become acid and the family don't have to
(11:53):
worry about the inheritance tax. That's gaining huge traction with
financial advisors and pretty much annual review now is having
to take account of age, wealth, beneficiaries and the current
arrangements that are put in place by the will and
how them modifying.
Speaker 2 (12:12):
Yeah, I mean, the obvious immediate thing to do is
to take that twenty five percent up to the highest
amount that you can and to give it straight to
your kids, assuming you can afford to do that.
Speaker 5 (12:20):
Yeah, it's such an unusual benefit. It's I mean, it's
it's politically very difficult to do. I mean, along with
the triple lock. It's been a statement of faith the
governments for a long period of time. But it is
an anomaly in the tax regime in that you get
tax really on the way in, and for this amount
of money, you get tax really from the way out.
Speaker 2 (12:40):
Whereas I says, of course, so the opposite, you get
no tax relief on the way in, but you get
it all on the way out.
Speaker 3 (12:45):
And that makes sense.
Speaker 2 (12:46):
And when we look at pensions, we think of it
as being tax relief on the way in and nothing
on the way out.
Speaker 3 (12:50):
But of course there is hidden away.
Speaker 2 (12:52):
There's twenty five percent or two hundred and sixty two
hundred and seventy five pounds, which is tax relief on
the way in and the way out. That's great, that's
the great incentive of pensions. Without that, and without ageterially,
if it's hard to see how anyone would be incentivized
to save anything beyond the minimum of their auto enrollment
contributions into a pension, Yes.
Speaker 5 (13:13):
I mean they were. I think we've seen quite a
lot of research recently. I think we have Pension be
just published on research showing just how small people's pension
pots are. So there's a delicate balance there. There is
a trap, of course that people have got to be
aware of with the tax free s, the current rules
allowing you to take the tax free some from the
age of fifty five. So yeah, it's quite tempting, you know,
(13:33):
if you're fifty six, fifty seven to fifty eight and
you see this looming change, it's quite tempting to take
that money out straight away. But if you do that,
from a text point of view, you have retired and
therefore you can't put any further money into the basket
that you'll get tax relief on as the money goes in.
So it's it requires a careful calculation. You need to
(13:56):
be confident that the pot, the residual pot, is sufficient
for what you're requs are likely to be when you
eventually cease early.
Speaker 2 (14:04):
Right, Okay, good, good point, good trap information. Can I
just ask you to explain what's different when you're under
seventy five.
Speaker 3 (14:16):
But I'll tell you what I think it is.
Speaker 2 (14:18):
I think under seventy five, I think it would still
be liable for HT, but it is not liable for
income tax because under the old rules, under the old rules,
if you died before seventy five, that that pension could
then simply break and you would receive the entire amount
tax free, or you could withdraw from it tax free,
which was really fairly extraordinary. I mean, that really is
no tax on the way and no tax on the
(14:39):
way out, whereas if you were over seventy five previously
you were, you did have to pay the income tax
on it. So that that's the difference. That's I just
wonder why you didn't know the answer to that one.
Speaker 3 (14:51):
Fascinating? Do I get that right?
Speaker 5 (14:53):
Then? Yeah?
Speaker 3 (14:53):
Yeah, okay, good, okay.
Speaker 2 (14:56):
And then the other thing that I wanted to ask
a little more detail on is this idea of taking
out insurance.
Speaker 1 (15:01):
How does that work?
Speaker 5 (15:02):
So the tricky decision is knowing when you're going to die.
So death is certain, but the date of your death
is not certain, and so looking forward and planning, you
know the cashloads are required to keep you in whatever
style of life you want to be kept in for
your life. How much of the pot is then left
(15:23):
over and how much can you afford to gift away.
So there are a bunch of different thresholds for gifts.
You know, if you've got a child or a grandchild,
getting married, you get the five thousand pounds allowance for
a wedding gift. On the birth of a child or grandchild,
there's a three thousand pounds allowance, says the annual occasional
(15:45):
gifts of two hundred and fifty pounds. A whole labyrinth
and there's a very good government website that covers all
that stuff. But the big one is how do you
make gifts that will not impact your lifestyle? Very important
to write a letter to the beneficiary saying, dear beneficiary,
(16:05):
I'm giving you five pounds, please rest and sure this
is going to have no impact on my standard of
living because that's the tax trigger. Yes, so you make
that clarification in the letter that accompanies the check or
the bank transfer. But then once that money has gone across,
you've got to survive for a period of time. So
there's a graduated declining tax liability. Currently over seven years.
(16:30):
It seemed to be over ten years where there's residual tax.
So in order to avoid so let's imagine that somebody
pays off their mortgage, or they know, they pay school fees,
or they buy a car or whatever, you know, some
capital amount. They then don't have the cash to pay
the tax that would happen if the person giving the
(16:51):
money dies in three years or four years. So the
prudent thing that many financial advisors would suggest that the
person giving the gift is to take it at declining
value of insurance out over the residual period, so that
when the you know, in the unlikely of then something
horrible happens and you've got the tax liability, crystallize the
insurance policy. Phase it wrong. You have to find the.
Speaker 3 (17:13):
Cash, okay.
Speaker 2 (17:15):
So basically you're taking insurance on money that you have
handed over early. There isn't really a way to take
out insurance if you haven't gifted money.
Speaker 3 (17:25):
That would make no sense.
Speaker 5 (17:26):
That's right, okay?
Speaker 2 (17:28):
And can I just take you back to gifts out
of gifts.
Speaker 3 (17:30):
Out of income.
Speaker 2 (17:31):
I thought that there was not a tax liability on
regular gifts out of income that did not affect your
standard of living.
Speaker 5 (17:36):
No, there isn't, there is it?
Speaker 3 (17:38):
Okay? Yeah, I just wanted to clarify that.
Speaker 5 (17:40):
I mean, the reason I make the point about the
the clarification is that if you're making a gift of
some substance and your estate is opened up, it's very
helpful for the person to receive the money to have
that the letter.
Speaker 2 (17:57):
Yeah, but those gifts have to be regular, don't they.
Isn't that the idea. You can't just give a lump salmon.
Call it a gift out of income.
Speaker 5 (18:05):
The classic way in which the So let's imagine that
somebody's got five grandchildren and they're helping with the school fees.
That's going to amount to quite a big amount of money, yes,
for that individual, but it can be affordable and it
can be regular. But it's worth just jotting down in
a note. You know, I'm paying this, but it's not
(18:26):
having an impact.
Speaker 3 (18:27):
Okay, understood, thank you. Okay. Now let's say that I'm.
Speaker 2 (18:32):
Looking at all this and I'm looking at Rachel Reeves
and I'm looking at Kirstarma, and I'm thinking for myself, gosh,
you know, maybe he would go, maybe she would go.
Maybe there might be something even more left wing put
in place. Maybe my tax is going to go up
more and more and more. And I'm kind of over
this whole thing. So I am going to move to
Milan with all the other rich people, and I'm going
to go there and carry on with a bidding up
(18:54):
of house prices so that local people can't afford to buy.
You know, the usual dynamic, right, the usual dynamic. As
someone puts in place something to attract rich people, rich
people come, they price out ordinary people, and then ten
years later they reverse the rules on the rich people.
But here we are, We're going to Milan where their
rules are still in plaze. I only have to pay
I think it's two hundred thousand dollars a undred thousand
years two hundred thousand years a year flat rate, however
(19:15):
high my income.
Speaker 3 (19:16):
So I'm all over.
Speaker 2 (19:17):
That I had to Milana buy myself a nice penthouse
flat and maybe a nice townhouse.
Speaker 3 (19:21):
I don't know. I think i'd prefer townhouse personally, but
you may prefer flat.
Speaker 2 (19:25):
How long How long do I have to worry that
they're still gonna come after my pension?
Speaker 5 (19:31):
Well quite quite a long time. And I think he's
the answer. We do, of course, have the reverse situation,
which is that Nigel Farne gets into power and, as
he announced a couple of days ago, alleviates the whole
burden of inheritance tax, which means that you've paid for
your international removal firm and you've brought your ferrari out
of me mistakenly because actually actually it makes a lot
(19:54):
more sense now to be paying five percent on assets
over three million pounds or whatever it is, and suddenly
your farm may be tax free rather than taxed without
business roll over relief and inaccessible a million pounds. So
it's the planning right now in this period of incredible
(20:15):
turbulence politically, I think is incredibly difficult, and of course
the upheaval of you know, I mean, there are people
clearly who are mobile internationally, and London has been a
relatively safe and that maybe people's judgment, so that's changing
after the weekend, a relatively safe place to live. Traditionally
(20:36):
we've been regarded as having a relatively stable government. Again,
that few baby changing. So there are mobile people who
will move. As you suggest that Dubai as a particularly
attractive offer of at the moment, I think as well.
And of course you can go to Spain as many
people have for many years, and agree a cap on
your liabilities.
Speaker 2 (20:56):
Okay, well let's say I head off, I head off
to Spain or Italy or whatever. Before I go, Before
I go, I give each of these grandchildren of mine,
not a gift out of income, but a lump sum
of a quarter of a million quid each, and then
I'm off.
Speaker 3 (21:08):
They're on their own. I've given them the money. We're
all done here.
Speaker 2 (21:11):
Amas six months later, you know, while gloating about something
or the other, I have a heart attack.
Speaker 3 (21:16):
I'm off, I'm gone.
Speaker 2 (21:18):
Will those heirs be here with inheritance attack?
Speaker 5 (21:22):
Yeah, and they will. And the whole process of probat
And as you said right at the beginning of this conversation,
the obligation to pay the tax falls on the beneficiaries,
and they're accounting for those receipts will be as if
the move never took place. So the excess re offer
that's caused the cardiac arrest will create a new burden
(21:42):
on people that thought that their life was run throughly simple.
Speaker 2 (21:46):
Okay, all right, so here we are. I think we've
been through all of it. So let me ask you
one last question, mark, have you taken your lump freysome?
Speaker 5 (21:53):
Oh? Definitely, long ago, long ago. I took my tax
free lumps off on my fifty fifth birthday at the maximum.
Speaker 2 (22:04):
Interesting, But what do you do with it then, because
then you've got you take it out of the investment
portfolio that it's in. Suddenly you've got money that is
now subject to income tax in capital gains tax, which
might require this is probably a longer podcast, but possibly
requires a slightly different type of portfolio to one where
everything at cruise tax free.
Speaker 5 (22:23):
Right, yeah, I mean it depends entirely on an individual's
asset mix and the opportunities that an individual has got to.
In my case, I was setting up a new business,
opening up a new insurance company, so it was an
obvious thing to create an amount of capital that was available.
But you know, everybody's circumstances are different, particularly as they
(22:47):
reached that stage in their careers.
Speaker 2 (22:49):
All right, brilliant Mark, Thank you. I strongly suspect this
is a topic we are going to come back to
again and again and again, but thank you for explaining it.
Speaker 3 (22:56):
Also clearly we appreciate it.
Speaker 5 (22:57):
Well, what if I've passed the test to do, feel
free to come back to me.
Speaker 2 (23:01):
Thank you, thanks for listening to this week's Maren Talk
to Your Money. If you like our show, rate review
and subscribe wherever you listen to. Podcasts also be shored.
Follow me and John on ex or Twitter at marinasw
and John Underscore STEPIC. This episode was produced by Samasadi
and Moses and production support and sound designed by Blake
(23:23):
Mabels and Kelly Gary.
Speaker 3 (23:25):
Questions and comments on.
Speaker 2 (23:26):
This show and all our shows always welcome. Our show
email is Merrin Money at Bloomberg dot net
Host
Merryn Somerset Webb
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