Inheritance Tax on pensions - budget announcement and consultation

Triumph13

Sarahspangles 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.

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

By taking a sustainable drawdown.  You can't plan to spend the capital unless you know when you're going to die.

warrenb

Lorian said:

Workerdrone said:

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

Children of Generation X too.

Who hahahaha. I am Gen X by the way.

Sarahspangles

Triumph13 said:

Sarahspangles said:

warrenb said:

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.

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

By taking a sustainable drawdown.  You can't plan to spend the capital unless you know when you're going to die.

So Mr and Mrs Average retire at State Pension Age and live very frugally on their state pension plus investment growth above inflation only? Despite providing for a pension.

Sarahspangles

warrenb said:

Lorian said:

Workerdrone said:

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

Children of Generation X too.

Who hahahaha. I am Gen X by the way.

Children of Generation X sounds very Halloween!

Boomers are currently aged 59 to 78. The older end of the cohort are more likely to have DB pensions, retired at 65/60 under the basic state pension provision, and won’t leave anything from their pensions.

artyboy

Albermarle said:

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.

And that is the key point, it will create a de facto relationship and dependency between pension trustees and estate executors/administrators that doesn't currently exist. I can't imagine trustees will be thrilled at the idea...

Leaving aside the extremely variable capabilities of executors, plus the family acrimony, wrangling, contesting and delays that can go with the probate process, the sort of estates that have a big pension pot alongside them are more likely to be larger and more complex themselves.

 All it takes is for an executor to make a mistake, and suddenly both they and the pension trustee could be getting told to pay incorrect amounts of IHT. What happens then, would one have to sue the other to deal with any shortfall? Would a trustee expect HMRC to validate the executor's information before they did their bit? Would HMRC act as arbiter between trustee and executor?

It sounds messy, to say the least!

Lorian

How are the trustees going to divulge any data to the executor and comply with GDPR. Maybe there is a clause there somewhere.

Triumph13

Sarahspangles said:

Triumph13 said:

Sarahspangles said:

warrenb said:

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.

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

By taking a sustainable drawdown.  You can't plan to spend the capital unless you know when you're going to die.

So Mr and Mrs Average retire at State Pension Age and live very frugally on their state pension plus investment growth above inflation only? Despite providing for a pension.

What do you suggest they do instead?  Blow it all in the first ten years then survive on just the state pension for the next twenty?  Typically quoted safe withdrawal rates are around 4% of original portfolio value, uplifted for inflation each year.

Workerdrone

I accept we are still waiting for the dust to settle, but Martin Lewis's article on this seems to suggest a recipient could end up paying both IHT and income tax on an inherited pension.

Take the scenario. Husband and wife have a £770k house, 500k in isas and 500k in pension. On the first death all the assets pass to the surviving spouse. with no iht. The second death occurs beyond the age of 75.

The couple benefit from the NRB and the RNRB so the first 1m of their estate is outside of IHT

As I understand it the remaining 770k which comes largely from the pension element will be subject to tax at 40%

so there is a tax charge of £308k straight away, but if I understand it correctly, the recipient, in this case the children or grandchildren are then further taxed on their nominal rate. If we consider they are likely still working it doesn't take much to push them now into the 40% tax bracket, hence a further £184k gets taken in tax, so from the 770k pot £492k is clawed back in taxes? Leaving only £278k as a net result.

Am I correct in this. If so its absolutely shocking.

Sarahspangles

Triumph13 said:

Sarahspangles said:

Triumph13 said:

Sarahspangles said:

warrenb said:

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.

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

By taking a sustainable drawdown.  You can't plan to spend the capital unless you know when you're going to die.

So Mr and Mrs Average retire at State Pension Age and live very frugally on their state pension plus investment growth above inflation only? Despite providing for a pension.

What do you suggest they do instead?  Blow it all in the first ten years then survive on just the state pension for the next twenty?  Typically quoted safe withdrawal rates are around 4% of original portfolio value, uplifted for inflation each year.

They buy an annuity, an arrangement which worked well for generations and until recently was the only option. This does mean that they may not get back what they put in. It also means they may get back more!

Grumpy_chap

artyboy said:

And that is the key point, it will create a de facto relationship and dependency between pension trustees and estate executors/administrators that doesn't currently exist. I can't imagine trustees will be thrilled at the idea...

The simplest thing seems to be this:
- holder of DC pension died
 - trustees establish surviving spouse Y / N
- if N, trustees deduct IHT at 40% and pay to HMRC.
 - trustees pay balance to Executors account.
 - executor deals with the pension value in the same way as any other asset of the estate
- executor calculated total IHT due.  Deduct that already paid by pension trustees.  Pay balance to HMRC (or claim refund if overpaid)
- executor distributes estate