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Better to give than take away

Phew. There was no much-feared dismantling of the rules and treasured tax reliefs relating to pensions, IHT and CGT in this week’s autumn Budget. But small changes to benefit lower earners, and certain types of businesses, were introduced. 

Pensions are frequently held up as a deserving target for tax raids because they benefit higher-rate taxpayers. Paul Johnson, director of the Institute for Fiscal Studies, has described defined contribution pension plans as “tax privileged savings accounts” offering “scandalously generous” protection from inheritance tax. And just days ago, one of his colleagues again highlighted the “incredible generosity of pension funds that can be inherited tax free”, arguing that the incentive for pension pots to be used as inheritance vehicles rather than their traditional purpose of drawing a retirement income was powerful and unfair. This is a somewhat distorted view of pension tax breaks. 

A pension can only be inherited tax-free when its owner dies before the age of 75 (and only then if a claim is made within two years). In those rare cases of early death, very often that pot will be a source of financial stability for young families left behind. Die after the age of 75 and anything left in your pension pot will be taxed at rates of up to 45 per cent. And the vast majority of pensions are used for their intended purpose – as pensions, not additional stores of wealth to be passed down. In any case, one reason so many people resented annuities was their tontine aspect and the fear that they would never reap fair rewards. Deliberate attemps to exploit the IHT relief may not work: the beneficiaries of anyone who transfers from a defined-benefit (DB) scheme into a defined-contribution (DC) pot within the two years preceding their death will face an IHT challenge from HMRC, while tax-free cash of up to 25 per cent of a pension pot found sitting in a bank account will count as part of an estate making it liable for IHT. 
Not so tax-free then. DC pots are burdened too with disadvantages compared to public sector and DB pensions. There are no guaranteed outcomes with DC pots and anyone with one will run into the costly Lifetime Allowance ropes a lot sooner than they would with a DB pot.

•     The FCA gave the green light to a new product this week, the Long Term Asset Fund (LTAF), for now only available to sophisticated investors and pension funds. But the LTAF could be made available to all private investors from next year. The Investment Association likes the LTAF because it will allow investors to access assets such as infrastructure, private companies and even limited partnerships through open-ended vehicles. But the LTAF comes with risks. The investments might sound appealing and safe but that doesn’t mean things can’t go wrong.

In their response to the FCA’s consultation, ShareSoc and the UK Shareholder Association didn’t mince their words: the LTAF proposal should be consigned to the scrap heap, and no new type of fund should be contemplated until the FCA had reported on its Woodford investigation. It’s a good point. It is already possible to invest in infrastructure and unlisted companies through VCTs and specialist investment trusts which do not have long redemption periods as Dave Baxter highlights here. Nevertheless, LTAFs are on their way. That’s a reminder that investors should heed Rishi Sunak’s budget rebuke to businesses and individuals who always ask “what is the government going to do?” No one can protect your interests better than you. Consultations and regulations can only achieve so much. LTAFs may be ideal for big pensions, less so for small investors. If Woodford could happen, anything can happen.