Tax planning and investing for retirement

aroominyork

I would like to check I am tax planning correctly please. OH and I have 5-10 years until retirement. Before we retire it is likely I will inherit about 150% of the amount we currently have in ISAs, SIPPs and cash. When we retire, we are unlikely to be able to live solely off investment income but I hope we will not use more than about 50% of the capital, with the other 50% (separate from the house we own) one day bequeathed to our children.

Putting aside the issue of what assets we invest in, my understanding is that:
- Each tax year we should first invest in SIPPs to mop up our 40% tax
- After that, and assuming we are standard rate taxpayers on retirement, SIPPs take tax on the way out and ISAs on the way in which is a nil sum game. ISAs have one advantage of giving flexibility to access cash pre-retirement, whereas SIPPs give 25% tax free and can be passed to our kids IHT-free.
- OH moved here from Australia in 2001 so will not have a full state pension. Her SIPP and workplace pensions are in the mid-five figures. That means that as things stand she is in danger of not using her full tax-free allowance on retirement so we need to build up her SIPP before adding to anything other than mopping up 40% tax.
- When I inherit, we should build up SIPPs as much as possible before investing in ISAs (possibly in very low risk assets, depending on how our overall plans and finances look them).

I would appreciate views on whether I have got this right and/or missed any options I should be considering. Many thanks.

kidmugsy

You are British and hope eventually to leave a large chunk of your future inheritance to your children. Perhaps part of it will be in the form of SIPPs. Presumably you'd like your wife to have use of the money before her death. Like the rest of us you can have no idea what the laws on "death duties" will be at your own death or hers.

One suggestion: get on google and learn about the legal device called a Deed of Variation or Instrument of Variation. This allows you to redirect all or part of an inheritance within two years of the death. You can direct it to whomever you like, or indeed to a trust. The money will be treated for IHT purposes as coming not from you but from the deceased.

If you think that your own estate, or your wife's, might someday be subject to IHT then an IoV is a neat way to avoid the inheritance making your estates even bigger. Note that if you do set up a trust you would presumably define the beneficiaries to be your wife, children, their children, ..... And you would no doubt make yourself and your wife the trustees. If you don't think there's any risk of IHT being relevant then there's no need to go to this trouble. But none of us can know that.

Otherwise you plan to avoid 40% tax and then to fill up your wife's SIPPs further seems a good one to me as long as you have enough of an emergency fund.