THOUSANDS of wealthy savers planning to pass on their pensions to their heirs had their hopes dashed in last week’s pre-budget report as the government closed a loophole.

Small self-administered schemes (SSAS) had allowed them to sidestep buying an annuity at 75 and bequeath their pension to family members instead. A quirk in the rules meant this was not subject to inheritance tax. A special self-invested personal pension (Sipp) called the Family Pension Trust worked in a similar way and offered the same tax breaks.

But now handing money to your family in this way could result in a tax charge of up to 70%. The payment could also be hit by inheritance tax if it is over the IHT threshold of £300,000. This could result in a punishing 82% tax on the money, turning a £100,000 legacy into just £18,000.

It now makes sense to take as much out of your pension as you can in a drawdown scheme and gift it to your heirs. As long as the gift is regular and does not affect your standard of living it is free of IHT.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained