SIPPs and inheritance tax

fred246

When I went for my free meeting at Pension Wise the one thing that he went on and on about was that you should put money in a SIPP to avoid inheritance tax. The more I think about it the more I think that a government will just suddenly change the rules. How many people use a SIPP in this way? How safe is it to assume it will work? Can the rules just be changed overnight?

cloud_dog

Does it matter what we say?

Fuzzie

As far as I know (as I have been looking into this myself) any money in a SIPP is not included in your estate for IHT as it’s part of a pension. Whilst on this earth, you may be able to nominate your uncrystalised pension (either a SIPP or in some cases a DB pension), to a third party (not necessarily your spouse) upon your death, subject to the terms of the pension provider. The nominated pension is then tax free if you die before the age of 75, and after 75 it is either taxable at the beneficiaries rate of tax, or if left ‘in’, it can be added to the beneficiaries pension pot (?).
If this is all correct, this must be a relatively tax efficient way of passing money on (if affluent enough!).
The administers of the pension fund in question can (but don’t have to) act on your wishes. Pensions can’t be passed on through your will without being included in your estate for IHT liabilities.
I am no expert on these matters, but the above are my beliefs.
I would also guess the above scenario could also be easily changed by the government in place at the time. 

arnoldy

You can only make your decisions on the tax system as it exists today, if it changes significantly deal with it at the time. 

If you die before 75 it all goes tax free to beneficiary, after 75 it goes tax free but withdrawals are subject to income tax (but no NI). If it's a big pension you might have to pay a LTA charge of the excess above about £1m. But that's 25% of the excess cf IHT at 40%.

This is all part of the UKs astonishingly generous tax and benefits system - state pension which you get credits for for bringing up children, sickness etc - so semi contributory. Generous tax reliefs on pension contributions, generous contribution limits (£40,000 pa with backdating possible c.f. Malta/parts of Europe where contributions are limited to a few hundred Euros a year), massive personal allowance of £12,500 - £1,900 in Sweden), tax free inheritance of pensions, massive ISA allowances to supplement pensions,  non means tested attendance allowance, and free NHS ..etc ..etc

Truly the land of milk and honey.

where_are_we

 Your financial plans should be based on today`s rules although Govenment can change them. One of the "pros" for pension investment is avoidance of IT and if you think you will pay IT it is one of many ways of avoiding it. Who knows when rising house prices in the south-east will stop. I am retired, have a smallish SIPP, continue to fund £2880 each year, and do not need to withdraw from it. Potential IT avoidance is just one of the tax benefits. 

  

Albermarle

Truly the land of milk and honey

It is true that the UK has a very tax friendly regime when it comes to non state pensions, ISA allowances etc . However this very largely mainly  benefits the better off . At least half the country could only dream of being able to put £5k pa in an ISA or pension, never mind £20K /£40K. Also IHT will never be an issue for the vast majority.

On the other side the benefits system is relatively stingy compared to most other West European countries and the NHS , although free, is underfunded.

Regarding pensions being outside the IHT net , it is probably a loophole that will be closed, or partially closed one day .

zagfles

Albermarle said:

Truly the land of milk and honey

It is true that the UK has a very tax friendly regime when it comes to non state pensions, ISA allowances etc . However this very largely mainly  benefits the better off . At least half the country could only dream of being able to put £5k pa in an ISA or pension, never mind £20K /£40K. Also IHT will never be an issue for the vast majority.

On the other side the benefits system is relatively stingy compared to most other West European countries and the NHS , although free, is underfunded.

Regarding pensions being outside the IHT net , it is probably a loophole that will be closed, or partially closed one day .

A myth. It's true that contributory benefits (eg state pension, SSP, SMP, contribution based unemployment benefit etc) are far stingier than countries like Germany, but our means tested benefit system is far more generous, among the top 2 or 3 in the world.

fred246

It just seems the sort of arrangement that another political party could abolish immediately. You couldn't really claim for hardship or loss of expected inheritance. They could just say from tomorrow all SIPPS will have 40% inheritance tax applied. That was my thought. Just wondered if there were any other opinions.

NottinghamKnight

Albermarle said:

Truly the land of milk and honey

It is true that the UK has a very tax friendly regime when it comes to non state pensions, ISA allowances etc . However this very largely mainly  benefits the better off . At least half the country could only dream of being able to put £5k pa in an ISA or pension, never mind £20K /£40K. Also IHT will never be an issue for the vast majority.

On the other side the benefits system is relatively stingy compared to most other West European countries and the NHS , although free, is underfunded.

Regarding pensions being outside the IHT net , it is probably a loophole that will be closed, or partially closed one day .

NHS isn't really underfunded, it's just very inefficient.

MK62

.......what would you do with the money if you didn't put it into a SIPP, and would it then also be "protected" from IHT?

fred246

MK62 said:

.......what would you do with the money if you didn't put it into a SIPP, and would it then also be "protected" from IHT?

Give it to the kids. It would then only be protected if I can stay alive.