Pension lump sum and Inheritance Tax(IHT)

jamesd

Dox, you quoted part of my post that was specifically about the defined benefit pension. The Staveley case is irrelevant to that because he's clearly had it for more than two years and no transfer is involved.

Staveley is potentially relevant if he transfers to DC but using his existing DC plan as the recipient if he's had it for more than two years may be sufficient. Staveley used an entirely new pension.

There seem to be some notable differences between this situation and Staveley because his intended beneficiary will get a lump in either case, not the Staveley life interest vs lump distinction.

In any case the law mandates taking financial advice before transferring and he clearly needs professional advice anyway.

jamesd

Apodemus wrote: »

There is no point avoiding IHT if the beneficiaries end up paying as much, or more, in income tax instead or it leads to them breaching their pensions life-time allowance.

A beneficiary pension* is not subject to the lifetime allowance of the recipient (but is to the one of the originator) and if the death happens before age 75 withdrawals are not subject to income tax. In the UK bequests outside a pension via a will are not subject to income tax. In the specifics here, the income tax position of the brother makes no difference because there can't be any income tax involved.

If the death was after age 75 it would be different because then beneficiary money is taxable income when withdrawn.

Key here is the difference between commutation and CETV amounts and avoiding inheritance tax mistakes, including valuing the two options after any inheritance tax effect.

* Actually nominee pension in this case but it makes no difference

xylophone

Your brother needs a Pension Transfer Specialist urgently.

He can try here

https://adviserbook.co.uk/ Tick "confirmed independent" and "pension transfer" when the menu comes up - he needs to stress the urgency of his circumstances.



Otherwise, this may be of interest.

https://forums.moneysavingexpert.com/discussion/6012796/deferred-gmp-only-pension-and-early-retirement&page=2&highlight= post 32.

pip895

I don't dispute any of what has been said above but my initial thoughts were that If I was in that position I might not want to spend my last months dealing with all the aggro of a pension transfer.

The path of least resistance might give him ready funds quicker - to tick of a few more items on his bucket list for instance. Tax efficiency may not be that high a priority - obviously if he had dependant children that would be different but as it is...

itwasntme001

pip895 wrote: »

I don't dispute any of what has been said above but my initial thoughts were that If I was in that position I might not want to spend my last months dealing with all the aggro of a pension transfer.

The path of least resistance might give him ready funds quicker - to tick of a few more items on his bucket list for instance. Tax efficiency may not be that high a priority - obviously if he had dependant children that would be different but as it is...

Agree with this completely.

jamesd

pip895 wrote: »

The path of least resistance might give him ready funds quicker - to tick of a few more items on his bucket list for instance.

Definitely a factor but the difference between typical commutation and current typical private sector CETV could increase the amount received from circa £256k to £512k. Considerable variability between schemes, though.

Getting CETV and transfer advice then money in his specific circumstances tends to be relatively non-challenging. "I'm dying with a few months life expectancy and want advice to compare commutation within a defined benefit pension to CETV and transfer" tells the prospective IFA that it's likely to be straightforward.

Cardew

Dox wrote: »

OP, your friend really needs to get expert advice from someone who is up to speed in this area. There's a notorious case which is going to be heard by the Supreme Court for a 'final' ruling, but as yet no date has been set: https://www.moneywise.co.uk/news/2018-10-19%E2%80%8C%E2%80%8C/landmark-ruling-could-see-pension-savers-ill-health-stung-stealthy-40-inheritance

So it may not be correct to say there's no IHT in a case of this sort, as post 7 has already pointed out.

Just an update on this case. I showed my friend all the excellent advice in this thread and he immediately contacted an IFA. He obtained a CETV which was over 3 times the value of his commutation figure.

He is now in urgent discussions on the ramifications of transferring this sum into a pension. The IFA has warned him of the probability/possibility of HMRC ruling that the sum is liable for IHT. (as shown in your link)

I don’t know the sums involved, but assuming the commutation figure was £100k and the CETV was £300k, is the following correct?

1. If he took commutation, the £100k would be added to his estate and his estate would be liable for £40k IHT; so leaving a nett £60k.

2. With the CETV, £300k would be liable for IHT assuming the eventual court ruling is in favour of HMRC, so leaving a nett £180k.

Seems like a no brainer!

As a complete layman, it seems to me that all HMRC would have lost by him having the CETV instead of commutation would be the £40k IHT, so why would they be entitled to £120k IHT on the £300k?

Thanks to all for the valuable advice.

jamesd

IFA might be able to use the existing pension to reduce the chance of that and the circumstances differ anyway but it's right to caution about it and keep sufficient money unspent to pay the bill.

I think you're right about the worst case.