Tax efficient pension strategy advice please

Albermarle

Out of interest , what happens if someone leaves their DC pot to someone in their will due to misunderstanding/DIY will etc 
Does it become subject to IHT or will the pension trustees just ignore what the will says ?

dunstonh

Albermarle said:

Out of interest , what happens if someone leaves their DC pot to someone in their will due to misunderstanding/DIY will etc 
Does it become subject to IHT or will the pension trustees just ignore what the will says ?

Pensions are not in the estate and not subject to the instructions in the Will.   Brynsam has covered some of the rare cases where it isn't.   And it is rare (apart from refunding overpayments).     If you give an expression of wish/nomination of beneficiary then its outside of the estate.  If you make a binding nomination (no longer subject to the trustees) then it's not.   Hardly anyone makes a binding nomination.  Brynsam has covered some of the rare cases where it isn't.     If there is no nomination of beneficiaries, the pension trustees will often ask to see the Will so they can get an idea of the intentions of the individual.   However, the ultimate decision lies with the trustees.  They will broadly follows intestacy or financial connections/linking that existed.     If someone was to make the mistake of making a binding nomination then a tax bill may well be due.

Brynsam

Albermarle said:

Out of interest , what happens if someone leaves their DC pot to someone in their will due to misunderstanding/DIY will etc 
Does it become subject to IHT or will the pension trustees just ignore what the will says ?

Quite a few people do precisely that - and sometimes it can be quite a lot of fun explaining to the eager would-be recipient that the dear departed couldn't actually bequeath their pension in their will.

A will doesn't normally bind the trustees. They may take notice of what the will says, but if it is in their gift to decide the ultimate recipient (something which will be in the terms of the scheme concerned), even if the pension is indeed paid to the proposed beneficiary, it won't be subject to IHT.

pensionpawn

Dazed_and_C0nfused said:

Don't forget if you have unequal pension pots you can make use of the (current) tax system to have unequal Personal Allowances.

If your wife had much less scope taking money from a DC pension she could apply for Marriage Allowance and have a Personal Allowance of £11,250 whilst you would retain your Personal Allowance of £12,500 and get £250 knocked off your tax bill, as recipient of Marriage Allowance.

This would only apply if you weren't a higher rate taxpayer.

..and if combined with UFPLS you should be able to take £18333 from your pot tax free. The marriage allowance is referred to as a tax credit however it does raise the recipients tax code / personal allowance by 10% (https://www.moneysavingexpert.com/family/marriage-tax-allowance/). Thus, as only 75% of a withdrawal via UFPLS is liable for income tax taking £18333 generates a tax liability of £13749.75 which is lower than £13750, the new personal allowance after application of the marriage allowance. Of course the spouse who donated 10% of the PA loses £250 of tax free income (so the net gain is actually £1667 pa) and this approach would only be a consideration in select narrow range of circumstances (e.g. the donating spouse has already taken their 25% TFLS). However as this is considerably higher than the widely advertised £250 advantage of using the marriage allowance I have done a considerable amount of Googling to see if there is a caveat out there somewhere. I haven't found one to date so if anyone knows why is isn't possible / allowed I would be interested to know.

Dazed_and_C0nfused

It is possible however there are niche circumstances where it would be a very bad idea.

The main reason being that you cannot have a Personal Allowance greater than £12,500 so if you took pension income of £13,750 you would be liable to tax on £1,250 and this would be reduced to nil by the £250 tax credit Marriage Allowance recipients receive.

If this happened in a year you had taken deferred state pension lump sum, admittedly a dwindling population can do this now, then you would be liable to 20% tax on the whole lump sum

pensionpawn

Dazed_and_C0nfused said:

It is possible however there are niche circumstances where it would be a very bad idea.

The main reason being that you cannot have a Personal Allowance greater than £12,500 so if you took pension income of £13,750 you would be liable to tax on £1,250 and this would be reduced to nil by the £250 tax credit Marriage Allowance recipients receive.

If this happened in a year you had taken deferred state pension lump sum, admittedly a dwindling population can do this now, then you would be liable to 20% tax on the whole lump sum

Thanks, I wasn't aware of that. So assuming that one continues to pay (£3k6 gross) into their pot, that they are accessing via UFPLS, along with an element of growth this quite a tax efficient vehicle.

Dazed_and_C0nfused

If you can take it out without paying tax then yes it's very tax efficient.

£2,880 out of bank account with £3,600 returning (subject to fees)  is a 25% return 

pensionpawn

Dazed_and_C0nfused said:

If you can take it out without paying tax then yes it's very tax efficient.

£2,880 out of bank account with £3,600 returning (subject to fees)  is a 25% return 

Yes, however I was thinking more along the lines of 'pot value' - £18333 (UFPLS tax free) + £3600 (£2880 net) and repeat until SPA. That's a annual tax free pension of £15453 (£18333-£2880) + £11250 (90% of donating spouses PA) = £26703
Although the £3600 contribution can continue until 75 the majority of your PA is now taken up by the commencement of SP (which I wouldn't defer) so I would probably crystallise then and take the one off 25% TFLS.

Dazed_and_C0nfused

You could take £18,333 and intimately not pay tax but it's not because you have a Personal Allowance of £13,750.

The £18,333 is split into £4,583 TFLS and £13,750 taxable income.  

£1,250 of the taxable income will be taxed at 20% but the tax due of £250 reduced to nil by virtue of the Marriage Allowance tax credit.

Someone who is Scottish resident for tax purposes could take £18,420 using the same method and not pay tax.

£4,605 TFLS plus £13,815 taxable income.

The tax due on £1,315 would be £249.85 (Scottish starter rate band) and this would be reduced to nil by virtue of the Marriage Allowance tax credit.

One downside for some people will be loss of part of the savings starter rate band, reducing the £5,000 to £3,750 (or £3,685 if Scottish resident).

pensionpawn

Dazed_and_C0nfused said:

You could take £18,333 and intimately not pay tax but it's not because you have a Personal Allowance of £13,750.

The £18,333 is split into £4,583 TFLS and £13,750 taxable income.  

£1,250 of the taxable income will be taxed at 20% but the tax due of £250 reduced to nil by virtue of the Marriage Allowance tax credit.

Someone who is Scottish resident for tax purposes could take £18,420 using the same method and not pay tax.

£4,605 TFLS plus £13,815 taxable income.

The tax due on £1,315 would be £249.85 (Scottish starter rate band) and this would be reduced to nil by virtue of the Marriage Allowance tax credit.

One downside for some people will be loss of part of the savings starter rate band, reducing the £5,000 to £3,750 (or £3,685 if Scottish resident).

Yep my example doesn't apply to some (most?) people, hence my caveat to that effect and I'm not disagreeing with you wrt you stating that the marriage allowance is a tax credit and not an increase to the PA. In fact the Gov website explanation supports that, however the link I posted to the MSE explanation does suggest otherwise:
"How the marriage tax allowance is calculated

The partner who has an unused amount of personal allowance can transfer £1,250 of their allowance to the other (so basically 10% of the full allowance). They can only transfer £1,250 – no more, no less.

This is how it works:

Part-time Peter works just enough and earns £5,000 at his local fish and chip shop. His full personal allowance for the year is £12,500, so he has plenty of spare allowance to transfer £1,250 to his wife.

Peter's wife, full-time Fiona, is a software developer. She earns £35,000 and is a basic-rate taxpayer (higher-rate tax starts at £50,000 for most). Her personal allowance increases by £1,250 to £13,750 when Peter chooses to make his transfer.

So she has an extra £1,250 which she would've paid tax on at 20%, but is now tax-free, so she's £250 up (20% of £1,250)."

Is the MSE article wrong and should in fact state that the PA of the recipient of the MA does not change however their tax bill for the year will be reduced by £250?
Everyone's financial circumstances are different and I'm just trying to determine if the scenario I've outlined does not fall fowl of any rules / regulations / laws and may therefore be useful for other if their circumstances permit?