Chapter: 2 - Inheritance Tax Mitigation: The Basics

Pensions

2.8.2

The regime introduced from 6 April 2006 to take the place of a good eight or nine different regimes which preceded it, whether retirement annuities or personal pensions, has rather changed the landscape.  This regime is described at 11.2. 

FA 2009 has, for high earners, significantly cut down the generous Income Tax relief previously given on pension contributions, that is up to the lesser of the individual’s net relevant earnings and the contribution limit for the year (£245,000 for 2009/10).  Looking forward, as from 2011/12 (with transitional anti-forestalling rules for 2009/10 and 2010/11), 40% higher rate relief will be restricted to those with taxable incomes not exceeding £150,000, with marginal relief for incomes up to £180,000. 

When it comes to taking the benefits, apart from the well-established option of income drawdown as an alternative to converting the whole fund into an annuity on retirement, there is under the FA 2006 regime the possibility, on reaching age 75 with funds still left in the pension pot, of taking out an ‘alternatively secured pension’ or ASP. 

While any funds remaining at death can be used to pay pensions to a surviving spouse/civil partner or financial dependent, it is clear that any money ultimately left after the deaths of all such individuals cannot effectively be used to mitigate IHT.  In particular, one option has been closed off by FA 2007: it is not possible to transfer money into the pension pots of other scheme members.