Inheritance tax on pension funds

LHW99

ali_bear said:

Another poster alarmed by nonsense they've read in a politically and intellectually crippled newspaper. 

But one with a better reason than many to be alarmed.

Bolt1234

I have something similar in that my dear husband will not live to the age of 75.  He has a pension pot worth just over £1 million. I thought that as the pot wasn’t part of inheritance tax then it would be looked at seperately and with no spousal exemption?  His pot states the beneficiaries are myself and our two sons who are both grown up.  98% goes to me and 1% each to our sons.  When the sad time comes I would look to take it out and give hefty deposits to my two sons to buy properties.

  We have wills and we have left everything to each other.  Have I missed something here?  Is it people who are planning to leave their pension pot to say their children that COULD get affected.  

 I know the budget isn’t too far off but Keep Pedalling who has helped me over the years says the pension pot has spousal exemption so just trying to clarify.  Should I think of changing the split potentially (not until the budget of course!).

Pat38493

Bolt1234 said:

I have something similar in that my dear husband will not live to the age of 75.  He has a pension pot worth just over £1 million. I thought that as the pot wasn’t part of inheritance tax then it would be looked at seperately and with no spousal exemption?  His pot states the beneficiaries are myself and our two sons who are both grown up.  98% goes to me and 1% each to our sons.  When the sad time comes I would look to take it out and give hefty deposits to my two sons to buy properties.

  We have wills and we have left everything to each other.  Have I missed something here?  Is it people who are planning to leave their pension pot to say their children that COULD get affected.  

 I know the budget isn’t too far off but Keep Pedalling who has helped me over the years says the pension pot has spousal exemption so just trying to clarify.  Should I think of changing the split potentially (not until the budget of course!).

Under the current arrangements, if your husband dies before he reaches 75, the pot can be passed to the nominated beneficiaries completely free of all tax, just as if it was cash in the bank.  It is not part of the estate either.

It's impossible to say what would happen uner any future rules as they haven't been announced yet.  Spousal exemptions applies to inheritance tax - therefore if pensions were made into part of the estate, he could pass the pension to you without IHT but not your sons (keeping in mind that there is of course an pretty large tax free allowance with IHT anyway)

It's been stated here a few times that making pensions part of the estate would be legally very tricky and couldn't be done quickly.

If on the other hand they changed the rule to say that pensions when someone died before age 75 are treated the same as they would be after 75, then he can pass the pension to you and your sons, bu tthe entire £1m would become taxable at the point you take out some or all of the money - it would be taxed like any othe rincome at your marginal rate. e.g. you decide to withdraw £25,000, it will count as £25,000 of income in the current tax year for you.

Or they could do something compeltel different which nobody has thought of on these boards...

Note - technically and legally , the form tha tyour husband completed is an "expression of wishes".  It's actually the trustees of the pension scheme who make the ifnal decision on who the pension pot is given to.  However in most cases they follow the expression of wishes - this only comes into play if, ofr example, someone got divorced and re-married and the form leaves the pension to their ex because they never bothered to change it - in rare cases the trustees might decide to overrule the form.

Bolt1234

Maybe it’s my small brain but didn’t Keep Pedalling say that as I am the main beneficiary of husbands pension pot then I will get if all due to spousal exemption free of any tax?  I am still working and am a higher rate tax payer.

dunstonh

Bolt1234 said:

Maybe it’s my small brain but didn’t Keep Pedalling say that as I am the main beneficiary of husbands pension pot then I will get if all due to spousal exemption free of any tax?  I am still working and am a higher rate tax payer.

Speculating on speculation is largely pointless.

Aretnap

Bolt1234 said:

Maybe it’s my small brain but didn’t Keep Pedalling say that as I am the main beneficiary of husbands pension pot then I will get if all due to spousal exemption free of any tax?  I am still working and am a higher rate tax payer.

There's currently no spousal exemption for pensions because that applies to inheritance tax, and pensions are not subject to inheritance tax. 

If your husband dies before he is 75 then under current rules you would not pay any tax on money you withdrew from his pension - not because of a spousal exemption but because that's what happens with pensions when you die before 75, regardless of who receives the cash.

 If he died after the age of 75 then any money you withdrew from the pension would be taxed as income - so you would save a lot of tax by leaving it in there until you were no longer working, and then by withdrawing the money gradually over a number of years. Which to be fair is what pensions are designed for - to give people an income in retirement, not big lump sums. 

Speculating on what if any changes might be announced in the budget is a bit of a fool's errand, however one possibility is that the tax free if you die before 75 rule would be scrapped and all withdrawals would be taxed as income regardless of the age your husband died at. Emphasis on the word "possibility" - the only people who really know at this point aren't saying anything.

Whether there would be a spousal exemption to that new rule, your guess is as good as mine. But if there wasn't, and if the intention is that a chunk of money would ultimately go to your sons to help buy houses, then it would be worth your husband changing his expression of wish form so that more of his pension went directly to your sons rather than to your personally. That way they could make withdrawals as their own income, and pay a lower rate of tax, assuming they are not higher rate taxpayers themselves.

It might actually be worth considering that anyway. If you withdrew money from your late husband's pension then gave it away to your sons then there would be inheritance tax implications were you to die within 7 years of making those gifts. Whereas if your husband's pension (or part of it) went directly to your sons there would be no question of inheritance tax on your own death, because it was never your own property and there was never any question if it being part of your estate.

Triumph13

[Deleted User] said:

Pat38493 said:

It's been stated here a few times that making pensions part of the estate would be legally very tricky and couldn't be done quickly.

For a DC pension, this would be trivial to do this and would be done as part of a normal Finance Act process.  

How it would be done for DB pensions is trickier.  Not in terms of the legislation but in terms (i) the political process for deciding the value of the pension to include in the estate, and (ii) for the payment of tax without upsetting the funding of some pension scheme (e.g. the assets no longer match the liabilities). 

As DB pensions are normally only inherited by the spouse, or minor children, I can't see any political party wanting to include them - unless they start being set up specifically as tax avoidance schemes somehow.

For DC it would be very simple to just have a flat tax charge at death, unless the funds are going to a spouse.  A 25% charge would mean subsequent basic rate withdrawals by the inheritors would have been charged 40% in total.  If you go higher than that, then a lot of people will just avoid it by withdrawing at 40% and gifting the proceeds, so that they avoid IHT if they live another seven years.

Albermarle

Triumph13 said:

[Deleted User] said:

Pat38493 said:

It's been stated here a few times that making pensions part of the estate would be legally very tricky and couldn't be done quickly.

For a DC pension, this would be trivial to do this and would be done as part of a normal Finance Act process.  

How it would be done for DB pensions is trickier.  Not in terms of the legislation but in terms (i) the political process for deciding the value of the pension to include in the estate, and (ii) for the payment of tax without upsetting the funding of some pension scheme (e.g. the assets no longer match the liabilities). 

As DB pensions are normally only inherited by the spouse, or minor children, I can't see any political party wanting to include them - unless they start being set up specifically as tax avoidance schemes somehow.

For DC it would be very simple to just have a flat tax charge at death, unless the funds are going to a spouse.  A 25% charge would mean subsequent basic rate withdrawals by the inheritors would have been charged 40% in total.  If you go higher than that, then a lot of people will just avoid it by withdrawing at 40% and gifting the proceeds, so that they avoid IHT if they live another seven years.

You ( and the previous poster)may well be right about it being simple to change DC pensions tax treatment on death.
However many commentators seem to think it would not be so easy, mainly I think due to having to change trust law.
I am not an expert so do not know the answer, but thought it was worth pointing out there are differing views

zagfles

Albermarle said:

Triumph13 said:

[Deleted User] said:

Pat38493 said:

It's been stated here a few times that making pensions part of the estate would be legally very tricky and couldn't be done quickly.

For a DC pension, this would be trivial to do this and would be done as part of a normal Finance Act process.  

How it would be done for DB pensions is trickier.  Not in terms of the legislation but in terms (i) the political process for deciding the value of the pension to include in the estate, and (ii) for the payment of tax without upsetting the funding of some pension scheme (e.g. the assets no longer match the liabilities). 

As DB pensions are normally only inherited by the spouse, or minor children, I can't see any political party wanting to include them - unless they start being set up specifically as tax avoidance schemes somehow.

For DC it would be very simple to just have a flat tax charge at death, unless the funds are going to a spouse.  A 25% charge would mean subsequent basic rate withdrawals by the inheritors would have been charged 40% in total.  If you go higher than that, then a lot of people will just avoid it by withdrawing at 40% and gifting the proceeds, so that they avoid IHT if they live another seven years.

You ( and the previous poster)may well be right about it being simple to change DC pensions tax treatment on death.
However many commentators seem to think it would not be so easy, mainly I think due to having to change trust law.
I am not an expert so do not know the answer, but thought it was worth pointing out there are differing views

IHT is already charged on DC pensions in some circumstances eg contributions made when terminally ill. See IHTM17043 - Pensions: IHT charges: contributions made whilst in ill-health - HMRC internal manual - GOV.UK (www.gov.uk) 

zagfles

Triumph13 said:

[Deleted User] said:

Pat38493 said:

It's been stated here a few times that making pensions part of the estate would be legally very tricky and couldn't be done quickly.

For a DC pension, this would be trivial to do this and would be done as part of a normal Finance Act process.  

How it would be done for DB pensions is trickier.  Not in terms of the legislation but in terms (i) the political process for deciding the value of the pension to include in the estate, and (ii) for the payment of tax without upsetting the funding of some pension scheme (e.g. the assets no longer match the liabilities). 

As DB pensions are normally only inherited by the spouse, or minor children, I can't see any political party wanting to include them - unless they start being set up specifically as tax avoidance schemes somehow.

For DC it would be very simple to just have a flat tax charge at death, unless the funds are going to a spouse.  A 25% charge would mean subsequent basic rate withdrawals by the inheritors would have been charged 40% in total.  If you go higher than that, then a lot of people will just avoid it by withdrawing at 40% and gifting the proceeds, so that they avoid IHT if they live another seven years.

Plus DB beneficiary pensions are already subject to income tax. Instead of making DC subject to IHT they could just bring DC drawdown in line with DB beneficiary benefits and make them subject to income tax.