Highly respected pensions commentator Steve Bee opened something of a can of worms with his recent Citywire article on whether pensions should be 'inheritable'. As usual, his views are worth thinking about and a considerable number of people – apparently from inside and outside the pensions industry – have taken time to comment.

Interestingly, the proposal is not necessarily what it could appear at first glance. He is not saying that people should be able to pass on any unused part of their pension pots as a cash lump sum to other people, when they die, but rather than it should be possible for them to arrange a transfer of the remaining fund to another person's – or other peoples' – pension funds.

There was actually a time, back in 2005 while “Pension Simplification” was being thought up, when we thought that this would be the case, at least within certain types of self invested pensions. Unfortunately, the government squashed this along with its introduction of inheritance tax on any money left in an alternatively secured pension (which is what we have to call pension drawdown after age 75) on death.

Why are governments so intransigent?
The problem with any government is that it knows it will only be around for a finite time, so its main priority is to maximise its income each year and minimise expenditure, so as to balance its books. (Mind you Gordon Brown, as Chancellor, seems to have abandoned even this basic tenet of faith – perhaps that is why he wants to hang on to power for as long as possible.)

This means that they are generally unwilling to forego short-term tax revenue, even if it is likely to be beneficial to the government over the longer term.

But pensions have tax breaks – don’t they have to be 'paid for'?
It is frequently said that, because there is tax relief on pension contributions (albeit soon to be limited for very high earners) and pension funds are free of UK income and capital taxes (except for the 10% withholding tax on dividends from UK companies, because Gordon Brown stopped pension funds reclaiming this in 1997) that it is only right to impose restrictions on how the money is used.

These principally relate to the limited amount of money that can be removed as a tax free sum (25%) and tax being applied to the income generated by the pension. It is sometimes argued that the pension regime represents a cross subsidy from those who are worse off to the wealthy.

What people frequently forget is that those who have pensions limit their entitlement to pension credits and some other benefits and are therefore saving the state money. So some degree of leeway should be the quid pro quo.

Family pensions
The idea of being allowed to nominate the person or persons to whom residual pension funds are passed on death after age 75 (before then there is no problem, although tax could apply depending on circumstances) makes considerable sense. It would make future generations better off and reduce their reliance on state benefits later in life.

This approach might also mean that demands for an end to compulsory annuitisation at age 75 would take on less prominence, because people would be more willing to use alternatively secured pensions.

Political donations
If there is any doubt that this is possible, remember that money given to a political party out of a pension fund on death after age 75 is totally tax free. So politicians can get the message when it suits them.

Getting advice
As ever, when it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.