Pensions may be setting a tax trap.

Thrifty members of the middle class, as well as the wealthy, face major tax trouble with their pensions as a result of changes in the tax laws over recent years, according to a study by economists John Shoven of Stanford University and David Wise of Harvard University. When a sizable pension is passed on to heirs, the tax rates on the last dollars saved can reach levels of between 92 and 99%.

Most professional financial advisers probably haven,t warned their clients who might be affected, Shoven cautions.,while people are keenly aware that pensions allow them to save before-tax dollars and compound their investment returns without current taxation, it is our impression that very few people know how pension assets are taxed upon withdrawal or upon the death of the owner of the pension."

Extra taxes on pensions can apply to people who are not wealthy if they have been regular pension savers. "Unless you are someone saving 30 or more years with a contribution of eight to 10% of your income, you are probably not affected. But someone who is making $40,000 by age 50, which is about the average income for 50-year-olds, could accumulate sufficient pension funds to trigger the extra taxes if they or their employer consistently contributed about 10% of salary to a pension. A pension that totals $1,200,000 by the time a person is 70 is large enough to trigger these excise taxes. which means that accumulations in the range of $300,000 to $500,000 by the time a person is 45 or 50 could be enough to trigger the excise taxes later, particularly if the person dies before having a chance to spend much of the pension."

When people die with substantial unspent savings, their heirs usually are better off, and never worse off, if those savings are held outside of the pension plan at the time of death, Shoven maintains. That is because the 1986 tax law subjected pension funds to an additional tax that does not apply to other inherited assets. Pensions refer to all "qualified" retirement savings, including defined-benefit...