Lifetime Allowance/Inheritance Tax Plan

CityOwl

We started the week investigating how to avoid hitting the LTA on my husband’s pensions, which then led to us taking stock of our savings, and this has now evolved into a sort of plan. I would be grateful for any comments on its viability, or have I just managed to confuse myself?

Our goal is to begin a comfortable early retirement in 2024, but to eventually leave as much as possible to our now adult and independent children.

Inheritance

• Our home will use up all our joint inheritance tax allowances (£1m) so anything else will be liable for 40% tax
• We currently have savings of £250,000 and assets worth £100K

Pensions

Husband’s Current DC Pension £565K, contributing £40K pa via salary sacrifice which helps keep his net pay below £100K

Husband’s Deferred DB Pensions

Employer’s Career Average £9,000 pa (NRA 65)
Employer’s Final Salary £2,800 pa (NRA 60)
Old DB Scheme 1 £5,500 pa (NRA 60)
Old DB Scheme 2 £3,000 pa (NRA 60)

My Current Pensions

LGPS Career Average £5,800 pa (accruing at £900+ pa - NRA 67)
SIPP £120K, paying in £1,000 per month

My Deferred DB Pensions

LGPS Final Salary £5,900 pa (NRA 65)
PCSPS Final Salary £2,360 pa (NRA 60)

State Pension – will both receive a full state pension at 67 in 2035

We guestimate that £40K net per annum is a very comfortable retirement, so should we use our savings and assets to bridge the gap between 56–67?  Our DB and state pensions will kick in at various times.  At 67 we will have a joint income of £54K.

The big plan?  Leave our home and uncrystallised SIPPs to the children, paying the 25% LTA at 75 and not the 40% inheritance tax upon our deaths.  We believe that our children may never be able to amass the pension provision that we have so this will help them to plan their own early retirements.  They will have to pay tax at their marginal rates when they access the SIPPs, hopefully this will be upon their retirements when they are basic rate taxpayers.

Apologies for the long post, your thoughts are welcome.

pip895

I haven't gone through the maths on your husbands LTA situation but I have some general thoughts.

1. It is nicer to be able to gift whilst alive - the gifts from excess income allowance is often missed and could be useful to you.
2. Don't bet too heavily on the tax regime staying the same - It wouldn't surprise me if the whole LTA/IHT status issue faces an over hall well before your plans come to fruition.  With the debt the country is in and the political direction of travel I don't think changes will make passing on wealth any easier.. 

DT2001

The things I would think about would include
1. Is your guess for expenditure reasonable - some posters on here can give you detail to the last penny, I use a more rough and ready method (like a balance sheet analysis, source and application of funds) Income, less payments to pension, ISA’s, tax man etc equals expenditure. I can split out big/regular by referring to bank/credit card statements but the ‘net’ approach picks up the odds and sods.
2. Then sort spreadsheet to show when DB pensions kick in and the shortfall needed. This way you can decide if you take some income from SIPPS to utilise your full PA. The rest could come from savings.
3. Agree with pip895 re gifting whilst alive (especially after a few years into retirement when you know your expenditure) and using excess income allowance.
4. I’d look at putting more into your SIPP using some of your savings 
5. If you have grandchildren then start pensions for them
6. It maybe worth drawing from your pensions, paying BR and helping your children to top up their pensions. 

7. I believe in spreading assets around, that is ISA, pensions, property so any changes in tax rules isn’t, hopefully, too dramatic
8. Just remember you have your property as a fallback position even if you gift generously.

Good luck you are very well set for an enjoyable retirement 

Albermarle

As above, the respected Institute of Fiscal studies has called the current pension tax rules 'indefensibly generous', and the way that unused pension pots are free of IHT and could be passed down through generations was mentioned. 

There is some sense in this as the generous tax relief rules are there to help people build up a good pot for retirement , so they can enjoy it , remain economically active ( which is good for the economy ) and not be a strain on the benefits system. Using pensions tax relief to build up big pots for non taxable inheritance could be in the firing line one day ( hopefully not, but best to be realistic )

Otherwise your plan is OK and you  seem to be sitting in a very nice place financially for your retirement. Your FS pensions are worth over a Million Pounds and you have a similar amount in DC pension and savings . Then plus two state pensions .You could easily spend more than £40K pa and still leave a big nest egg , even if the tax regime does change one day .

zagfles

Few more options to consider:

If husband fully crystallises his SIPP at 55 he might just come in under the LTA, even with another couple years of £40k, depending obviously on investment returns. Then he'd need to make sure he draws down enough to avoid the age 75 test on growth (but not till he's retired, to avoid triggering the MPAA), so avoiding any LTA charge completely. But it might be worth not crystallising 100% to avoid potentially tipping the LTA in one of the DB schemes, as that would result in reduced benefits, bear in mind the freezing of the LTA and inflation revaluation of the DB pensions.

Then if you intend to leave the SIPPs to the children anyway, you could give them the TFLS from the SIPP when you take it, making that gift almost certain to be IHT free (as long as you don't both die in the next 7 years). Then if/when they inherit the crystallised SIPP, there'll be no LTA charge.

As above when talking long term there are almost certain to be pension legislation changes, there'll likely be 5 or 6 general elections before the kids inherit anything, so as well as stuff like investment returns there's a lot of crystal ball gazing required

itwasntme001

I would also utilise the £3k per tax year per person gift to whoever you want.  It becomes immediately outside of your estate so no 7 year rule or anything like that.

I think it doesn't require record keeping as well, unlike the excess income gifting?  Can someone please confirm?

If so that would be an additional advantage, assuming you won't need that excess income gifting in the first place.

Albermarle

itwasntme001 said:

I would also utilise the £3k per tax year per person gift to whoever you want.  It becomes immediately outside of your estate so no 7 year rule or anything like that.

I think it doesn't require record keeping as well, unlike the excess income gifting?  Can someone please confirm?

If so that would be an additional advantage, assuming you won't need that excess income gifting in the first place.

It is a good idea to keep records of gifts ( even exempt ones ) . If nothing else it will help the executors of the will . In this case a simple record is all that is needed.
Another point is that if you gift more and then die within 7 years , then you have not actually lost anything . You only have to pay some/all of the IHT that you would have paid anyway . Seems to be a common misconception that if you gift a large amount and then promptly die then you will pay more IHT , which you will not.
More of a problem  is if you gift a lot and then want social services to fund your care . There is no 7 year rule for deprivation of assets.

gm0

At the present time potentially exempt transfers (PET) gifts of capital above the 3000 annual limit can also be used.  Regardless of the source of the funds, pension income, TFLS, other savings.  Money being fungible.  And this is not gifting out of regular income or subject to the 3000 limit

These rules - live 7 years to taper IHT to zero approach means pre or early retirement gifting has good odds to work.  And a 40% bonus to capital transferred vs waiting, dying, paying up - for sums above the line. 

Provides "bank of mum and dad" help to children as young adults towards property and other uses at a more useful stage in life than 20-40 years later.  It also manages the risk of future change to the rules unless hideously detailed and deeply retrospective which is realtively unlikely though not impossible.   It smooths out family wealth reducing the amount each member has in good time making the treasury wonk job much more difficult to design and apply a new "one off" or first cycle of a periodic wealth tax.   The tall poppy parent is an easier target than the family where each member has more even resources.

Naturally it requires you to trust your children or other gift recipients as once handed over all "control" is lost.  But the consequences are their own if they choose poorly - use of money, failed relationships etc. 
Some people are fine with that.  Others not so much.  There are more complex approaches which have their own tradeoffs 

Obviously you probably do not want to leave yourself actually short of money or materially at risk of a failed retirement where you become dependent upon your kids to support you in extreme old age.   So everything in moderation.

The benefits of the SIPPs being uncrystallised vs crystallised (assuming you plan to live to 75) is marginal. 
The rules on SIPP inheritance can change.  But if they already have long had the money.  They already have the money and IHT no longer applies.   Implication.  Consider crystallisation.  Draw no income.  (So MPAA is fine if any DC saving is still expected). 

TFLS used as fungible cash with other assets to transfer some capital to heirs early - banking the 40% IHT avoided bonus progressively and fully after 7 years elapsed after gifting.

zagfles

Albermarle said:

itwasntme001 said:

I would also utilise the £3k per tax year per person gift to whoever you want.  It becomes immediately outside of your estate so no 7 year rule or anything like that.

I think it doesn't require record keeping as well, unlike the excess income gifting?  Can someone please confirm?

If so that would be an additional advantage, assuming you won't need that excess income gifting in the first place.

It is a good idea to keep records of gifts ( even exempt ones ) . If nothing else it will help the executors of the will . In this case a simple record is all that is needed.
Another point is that if you gift more and then die within 7 years , then you have not actually lost anything . You only have to pay some/all of the IHT that you would have paid anyway . Seems to be a common misconception that if you gift a large amount and then promptly die then you will pay more IHT , which you will not.
More of a problem  is if you gift a lot and then want social services to fund your care . There is no 7 year rule for deprivation of assets.

Only if you could foresee the need for care at the time of the gift. Unlikely that you could foresee the need for care in over 7 years' time!

CityOwl

Many thanks to you all for taking the time to give such detailed responses.  I will sit down with my husband and we will review the guidance that you have provided and factor this into our plans. I may have some follow up questions, which due to a very busy week ahead, may not materialise for a couple of weeks. 

As many of you have mentioned gifting, I thought it would be appropriate to let you know our current situation.

Child 1 - Already been gifted £77K for first property
Child 2 - Planning to buy in next 2-3 years and will be giftied approximately £80K from our income
Child 3 - No plans to buy a property and may work abroad, so this year we began putting £4K into a LISA and will continue every year until a property is purchased or we have gifted £80K plus inflation

Kids are in their early to mid twenties so lots of unknowns and growing up to do.  They have student loans and deposits to save, as £80K does not go far in the South East and London. We don't want to hand everything to them on a plate and as they are so young we want to mitigate for relationships not working out and maybe having to start again (I do overthink things).

CityOwl

We totally appreciate that there is no guarantee that the rules and allowances will not be amended/tweaked in the future.  We were hoping that the allowances may even be increased in line with inflation in due course, even if this is after 2026.  It is anyone's guess what the situation will be in 25-30 years so we will have to roll with the punches.