Inheritance Tax on pensions - budget announcement and consultation

MallyGirl

ukdw said:

Might be of interest to the discussion about IHT on pensions.  

Previously buying a guaranteed annuity had an extra IHT liability in most cases, which was a negative factor.   I think the change in the budget may have turned this round into a slight positive - as the IHT liability for guaranteed annuities isn't quite as large as the funds needed to purchase them.

Just did a quick Annuity IHT liability calculation for a £200k 30 yr Level Annuity I was already considering purchasing, (which would pay just under £12k a year) - and the "Estimated Open Market Value" and therefore IHT liability comes out at about £133k from day1 - and then gradually reduces - to around £60k 20 years in for example.  

So from day 1, based on last weeks rates,  buying a level, 30 year guaranteed annuity would bring around a 33% reduction in IHT exposure I think.

I used this calculator to work out the market value one month into the 30 year minimum term.  https://www.gov.uk/government/publications/inheritance-tax-guaranteed-annuity-calculator

interesting. There might be a renewed interest in annuities once the dust has settled and the consultation is complete.

warrenb

The problem here is with auto enrolment the time bomb is further down the road. For Mr/Mrs Average they will get 20% tax relief on their contributions, even at legislated minimum level of contributions, they will accrue nearly 300k in a pension. Now they have the issue of IHT if not passed to spouse. Even with the spousal zero rate, that just piles it onto the next generation when the spouse dies, as the accumulated value of probably 2 pensions is then taken into account.

Remember this is based on average, so this roll up affect probably means that after receiving 20% relief to pay in you will be paying 40% to pass on.

This is basically a huge tax on the next generation and is basically to give it a name, the baby boomer tax grab.

Sarahspangles

warrenb said:

The problem here is with auto enrolment the time bomb is further down the road. For Mr/Mrs Average they will get 20% tax relief on their contributions, even at legislated minimum level of contributions, they will accrue nearly 300k in a pension. Now they have the issue of IHT if not passed to spouse. Even with the spousal zero rate, that just piles it onto the next generation when the spouse dies, as the accumulated value of probably 2 pensions is then taken into account.

Remember this is based on average, so this roll up affect probably means that after receiving 20% relief to pay in you will be paying 40% to pass on.

This is basically a huge tax on the next generation and is basically to give it a name, the baby boomer tax grab.

That’s assuming Mr and Mrs Average don’t access their pension though. How are they funding their own old age?

Albermarle

warrenb said:

The problem here is with auto enrolment the time bomb is further down the road. For Mr/Mrs Average they will get 20% tax relief on their contributions, even at legislated minimum level of contributions, they will accrue nearly 300k in a pension. Now they have the issue of IHT if not passed to spouse. Even with the spousal zero rate, that just piles it onto the next generation when the spouse dies, as the accumulated value of probably 2 pensions is then taken into account.

Remember this is based on average, so this roll up affect probably means that after receiving 20% relief to pay in you will be paying 40% to pass on.

This is basically a huge tax on the next generation and is basically to give it a name, the baby boomer tax grab.

The idea of a pension and associated tax relief,  is to fund your retirement, not as a way of passing on an inheritance. That is what is behind the change announced yesterday.
Presumably Mr and Mrs Average ( with low savings elsewhere) would use this £300K for that purpose,  or some of it at least, and it would be unlikely that by the time of the second death, there would still be £300k left.

Moonwolf

warrenb said:

The problem here is with auto enrolment the time bomb is further down the road. For Mr/Mrs Average they will get 20% tax relief on their contributions, even at legislated minimum level of contributions, they will accrue nearly 300k in a pension. Now they have the issue of IHT if not passed to spouse. Even with the spousal zero rate, that just piles it onto the next generation when the spouse dies, as the accumulated value of probably 2 pensions is then taken into account.

Remember this is based on average, so this roll up affect probably means that after receiving 20% relief to pay in you will be paying 40% to pass on.

This is basically a huge tax on the next generation and is basically to give it a name, the baby boomer tax grab.

I keep seeing takes like this and I have to say, I don't understand them at all.

I would have thought that the purpose of pension tax relief is to encourage people to save for their own old age not to pass on extra wealth.  Changing of the rules on purchasing annuities was for a variety of reasons but the ability to pass on pensions as an inheritance, was that a loophole or by design?

The change doesn't impact those who have saved for their partner's old age as well as their own, due to spousal exemption.  Clearly there are unmarried, not in a civil partnership couples who are excluded but they are excluded from other IHT exemptions as well.

As it is, you still pass on a lot of wealth even after tax, much better with a £1m pot now being able to drawdown £40K a year then passing on £600k after 40% tax than having to buy an annuity and passing on nothing.

Albermarle

LHW99 said:

Albermarle said:

artyboy said:

DRS1 said:

Bolt1234 said:

Yes.  In the will the pension pot is left to the wife tax free.  She then uses a deed of variation to give some of the proceeds to her son within 2 years

The will doesn't govern the pension pot's destination after death.  That is still down to the discretion or the scheme trustees/administrators and the expression of wishes from the member.  None of that is being changed only the tax law.

So would the trustees be required to withhold the appropriate amount to cover IHT on the estate? I don't see how an executor could be liable for reclaiming it off whoever the pension got paid out to - and there will doubtless be situations where the pension pot is sufficiently big that the resultant IHT liability will exceed the value of the rest of the estate...

Who'd want to be an executor ever again?

Yes, they would be required to pay any IHT liability apportioned to the pension direct to HMRC, before paying out the rest to any beneficiaries. ( see Snowman's post above )

But doesn't that mean that (as HMRC would have been paid by the executor) that the pension co would not need to pay the apportioned IHT directly from the pension?

I think it is proposed that there will be some kind of HMRC on line calculator.
After being fed the appropriate info, it will allocate nil rate bands proportionately to pension and non pensions assets, and inform the pension provider and the executor how much they each need to send to HMRC to cover their respective IHT tax liabilities.
Maybe after consultation, drafting of legislation etc., details may change.

daveyjp

Albermarle said:

warrenb said:

The problem here is with auto enrolment the time bomb is further down the road. For Mr/Mrs Average they will get 20% tax relief on their contributions, even at legislated minimum level of contributions, they will accrue nearly 300k in a pension. Now they have the issue of IHT if not passed to spouse. Even with the spousal zero rate, that just piles it onto the next generation when the spouse dies, as the accumulated value of probably 2 pensions is then taken into account.

Remember this is based on average, so this roll up affect probably means that after receiving 20% relief to pay in you will be paying 40% to pass on.

This is basically a huge tax on the next generation and is basically to give it a name, the baby boomer tax grab.

The idea of a pension and associated tax relief,  is to fund your retirement, not as a way of passing on an inheritance. That is what is behind the change announced yesterday.
Presumably Mr and Mrs Average ( with low savings elsewhere) would use this £300K for that purpose,  or some of it at least, and it would be unlikely that by the time of the second death, there would still be £300k left.

Reminds me of an anecdote a friend told who is a retired partner from one of the big accoutancy companies, so not without a bob or two.

He was in a room full of very wealthy pensioners in their 80s and 90s discussing the triple lock and they all said it shouldn't be scrapped because if it was they wouldn't be able to save as much.

Sarahspangles

Moonwolf said:

I would have thought that the purpose of pension tax relief is to encourage people to save for their own old age not to pass on extra wealth.  Changing of the rules on purchasing annuities was for a variety of reasons but the ability to pass on pensions as an inheritance, was that a loophole or by design?

The change doesn't impact those who have saved for their partner's old age as well as their own, due to spousal exemption.  Clearly there are unmarried, not in a civil partnership couples who are excluded but they are excluded from other IHT exemptions as well.

I’ve noticed recently that there have been several posts by bereaved adult children who are wondering where their ‘inheritance’ from their parent’(s) pension has gone, even when that parent was quite elderly and in receipt of a DB pension. It’s definitely time for a reset in understanding about pensions, annuities, and life insurance.

Workerdrone

DairyQueen said:

Madeinireland101 said:

I've currently got an expression of wish on my 2 DC pensions saying 50% to my wife and 25% to each of the children.

1. if I’m reading this all correctly it appears I’d be better off combining the schemes and changing the EOW to put 100% to my wife. Is that correct?

2. Also it appears to me that there is no point in keeping the money in a pension at all now - may as well start by extracting the tax free 25% by £40k a year and putting it in two ISA’s for me and the wife. Then extracting the rest gradually up to the 40% limit to wind the pensions down completely if I can. Might be worth keeping anything that might result in 40% tax as if I pass it eventually to kids then they might have a lower tax bracket to use.

3. Will now also look to use gifting to give away as much as possible to the kids too. Pensions appear to be finished from my point of view unless someone can tell me the benefit of keeping one? ISA’s will be more flexible.

We are thinking along the same lines.

Problem being that unwrapping the pension will likely incur income tax, and that ISAs will still form part of your estate. Whether to leave wrapped will depend on the identity of the beneficiary and whether you/they would incur more tax.

For example, if you are under 75 and spouse is 100% beneficiary then s/he will inherit free of IHT and income tax if you die before your 75th birthday. If, OTOH, you are a widow/er/single and are over 75 then your pension could be subject to a heinous IHT tax charge and then subject to additional (income) tax on-top by beneficiaries when they drawdown.

Our inheritance plans are totally screwed by this budget. We are not wealthy but we were hoping to leave a reasonable sum to my nephews and to OH's daughters and grandson. They are the generation that will suffer. 

Socialists hate inherited wealth but, Lord's sake, is it really necessary to destroy Millennials and Gen Z's inheritance in this way? 

The real losers from this are the children of wealthy boomers.

Lorian

Workerdrone said:

The real losers from this are the children of wealthy boomers.

Children of Generation X too.