Lifetime allowance

jamesd · 17 October 2016 at 10:03PM

If a pot starts out at a million Pounds and 25% is taken as a tax free lump sum, 7% growth (not inflation adjusted) on the rest would produce a gain of £52,500 a year so something would need to be done to limit that. It could be lower growth options or just doing say some VCT buying in the early years while taking more than the basic rate band out of the pension.

Personally I'd just get some VCT buying done since while that won't eliminate all of a 40% tax rate it can eliminate the bill on say 30k of basic rate and 30k of higher rate and then generate some tax exempt income.

Inheritance tax avoidance with pensions is a fact of life but it's also a high risk thing since it's not what pensions are for and there can't be much confidence that the rules will not be changed in the future to scupper such a plan. That's a bigger potential risk/cost than paying the income tax - with possible reliefs - along the way on just the portion that might go over the LTA.

caveman8006 · 18 October 2016 at 3:03PM

The crazy thing is that there is clearly an incentive in the early drawdown years to leave all of the returns building up in the plan in case you die early (in which case you can pass the whole estate on tax free, it seems). But obviously, as you approach 75 the potential tax liability will get harder and harder to manage, even by the strategies that jamesd outlines above. As an extreme example: a 55 year-old who goes into drawdown with a £1m fund that earns 7% per annum would have a fund worth about £3.85m on the eve of their 75th birthday: if they died that day they could pass on the whole fund tax free; the next day they would be liable for a £1.5m penalty tax with little way of mitigating it. Trip to a Swiss clinic anyone!

PensionTech · 18 October 2016 at 4:56PM

But either way, it still means that anybody who expects to outlive 75 will sooner or later be forced to withdraw all their investment gains at their marginal tax rates to avoid the penalty tax...on large pots of £1m or so then this might well force them into a higher tax bracket. Not an ideal situation for those hoping to use pensions primarily for IHT protection.

Well, yes. But pensions are not intended to be an IHT avoidance vehicle. They are tax-relieved because it is beneficial to society to ensure that individuals have enough to live on during retirement. The point of a pension is to live on it, not to hoard lots of money away and pass it on to your kids without paying tax. I agree that there is some mismatch when it comes to dying pre/post-75, but I think the pre-75 situation is an anomaly, not the post-75 one.

caveman8006 · 19 October 2016 at 2:34PM

Again, I agree with your points PensionTech and certainly think that that the absence of a symmetrical BCE check on death before 75 to the one at 75 (regarding treatment of retained investment gains) is a strange anomaly (hence why I questioned your interpretation of the slightly ambiguous wording of the HMRC advice and have submitted a specific request to them for confirmation of this). The point though is that, with the increasingly widespread discussion of the IHT benefits of pensions in the Financial press and the growing likelihood of this scenario becoming more widely relevant as the LTA gets cut, I just wanted to focus readers and practitioners' minds on the subtleties of the legislation. To my mind, this makes it increasingly important for some (albeit relatively wealthy) individuals to concentrate high risk/high return assets in ISAs and to leave IHT-focussed "drawdown" pension accounts in lower-returning capital-secure/cash-like investments. This may require a careful focus on cash deposits/fee structures of different SIPP providers. Eg. Standard Life (and many others) have very few eligible deposit takers on their SIPP investment list, making it virtually impossible to earn reasonable cash returns on SIPP investments while keeping FCA protection. They may also treat these type of investments (somewhat counter-intuitively) as non-standard and high risk, making them subject to higher fees than apply to unit trusts.

joujou · 19 October 2016 at 4:10PM

The lifetime allowed is !!!!!! I don't see it lasting. I think we will eventually reduce the annual limit to something like £10000, possibly also cap the tax rebate at %30 and do away with the lifetime limit or increase it by x5 or x10

PensionTech · 20 October 2016 at 9:29AM

I questioned your interpretation of the slightly ambiguous wording of the HMRC advice and have submitted a specific request to them for confirmation of this

If it helps, there is some pretty clear guidance from HMRC here on the taxation of a lump sum death benefit paid from a crystallised flexi-access drawdown fund upon death before age 75:

Where the member or beneficiary was:
under age 75 when they died, and

the payment was made within 2 years of the day on which the scheme administrator either first knew of the member’s or beneficiary’s death or could reasonably have been expected to have known of the death,

the lump sum is payable tax-free.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073600

bigadaj · 22 October 2016 at 6:56AM

joujou wrote: »

The lifetime allowed is !!!!!! I don't see it lasting. I think we will eventually reduce the annual limit to something like £10000, possibly also cap the tax rebate at %30 and do away with the lifetime limit or increase it by x5 or x10

To aid the baby boomers even more?

Lifetime allowance

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