Inheritance Tax on pensions - budget announcement and consultation

RogerPensionGuy

The government will have lots of tax receipts coming down the road they have made and it will keep flowing.

House prices have just rolled up and up. 

Many people who worked hard for 45 years can have good savings for rainy days, plus a hefty private pension. 

IHT, income tax bands have been well eroded by inflation and house prices by design. 

Did I read only 6% of estates pay IHT. 

In the future that 6% will just keep rolling up and up and the value of the IHT will roll up to boot. 

1 pence off a pint beer, so only £6.29 instead of £6.30, what a joke government is playing with hard working persons. 

Chatting to friends similar to me that are getting all upset about the IHT pension changes because their poor children will potentially inherit less in the future, how terrible it is I'm being told.

I've always had a view inheritance is just nice and expect to get none or indeed my estate will leave none, anything is a very nice bonus.

So I'm not personally bothered about the IHT pension change. 

However I feel sorry for people who transfered good DB pensions in to poor hi cost DC SIPP and the like hoping the pension IHT door would not be closed, I wonder if their advisors fully briefed these people of the liklihood possibility this door would be closed, maybe some DB to DC SIPP transfer people will comment on if they were advised well on this matter?

With such tax and pensions football, I will keep a very very mixed bag of investments, property, DB, SIPP, ISAs, premium bonds, cash and the like and I'll feed off different items in different fashions and times as I see fit.

Plus, think I'm more likely to buy an annuity or two from DC SIPP funds. 

leosayer

Albermarle said:

Grumpy_chap said:

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 

What if the total estate, including the pension, was not actually liable for IHT ?
It would not then be correct for the pension provider to have extracted 40% from the pot first.
In any case as per my above post, even if the overall estate was liable for IHT, it does not necessarily mean the pension pot will get hit  by 40% tax on the whole pension pot. Very unlikely in fact.

Selling 40% of the pension assets to pre-pay a tax bill that might not be due is very far from being in the beneficiary's best interests.

Bolt1234

I have asked this before but as we are talking about children etc. 

My husband will pass away before 75.  He has a life limiting illness.  We have two grown up children.  I am the beneficary of his pension pot which is considerable. He wont be able to make use of it to fund his retirement because he wont be here.

What stops me taking it tax free as his spouse and then using a Deed of Variation to pass onto my grown up children.  What tax would they pay?  Is it a gift from me as long as I live 7 years?  I am relatively young for this to happen and have my own funds to cover my retirement.  I know - its unusual situation.  

artyboy

Grumpy_chap said:

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 

But the pension isn't in the estate. Regardless of the way it's being interpreted for IHT, It's still a trust and so the Trustees shouldn't be paying it to the executor, even with the express instruction that they act as an intermediary. What happens if the executor decides not to hand it over to the trustees intended beneficiary(ies), who sues whom then?

(Obviously if the executor is the beneficiary that the trustees have decided to pay to, this is all moot...) 

RogerPensionGuy

https://www.gov.uk/alter-a-will-after-a-death#:~:text=To change a will you,6 months of making it.

***

Posted the above on here because a few people are talking about this item. 

It's worth reading how it works and understand the flowpath of this vehicle. 

MallyGirl

I am sure I have seen this answered on another thread. AIUI If you do a deed of variation then it will be like you never inherited so your nil rate band as spouse doesn't get applied and your children will get hit with IHT.

GunJack

tim9333 said:

But should pensions ever have been excluded from a deceased's estate?

Probably not....in the case of dB Vs DC it was quite blatantly biased towards DC. Yes most (if not all) dB had a surviving spouse or equivalent element, but only at 50% and income tax would still be payable on it.

Albermarle

tim9333 said:

Workerdrone said:

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.

You are correct - the dependents face a marginal tax rate of 64% on accessing their inherited pension - double taxation at 40%

Is it shocking? - yes, when compared to current arrangements

But should pensions ever have been excluded from a deceased's estate?

The balance now is to drawdown your SIPP and gift ISAs to dependants to avoid IHT whilst still retaining sufficient flexibility for needs like care home fees  

As explained in my recent post and the one from Snowman. The IHT liability/nil rate band  will be shared out between pension and non pension assets, so that the  pension will not be subject to 40 % on the whole amount, just on a proportion of it.
So even if the beneficiary pays income tax on the remainder, the total tax take from the pension will not be as high as 64%. In most cases will be significantly less, but more than now of course !

RogerPensionGuy

https://www.forbes.com/uk/advisor/investing/average-pension-pot-in-uk/#:~:text=Unbiased.co.uk-,Overall average,20,077 as of May 2024.

***

Posted the above on here as a point of reference about average pension pots at various stages of life/age.

The article mentions average and median picks a value, great information, I have friends & family from fairly similar backgrounds, jobs, kids, pay and houses in the current 50 to 70 years range, a few have no pension, maybe 40% have the average, maybe 40% double the average and 10/15% have 4, 5 or more times the average mostly because they became engaged in pension & AVC feeding early on by family or trusted friends and picked the pension extra route and stuck to it by and large and the last few or 5 years of paid employment filled pensions at maximum possible inputs reference their living needs and spare cash, they weren't getting anywhere near the AA or LTA limits, however with time and low cost pensions, a few have sailed past that last LTA figure that was essentially removed April 2024 and just the 268 25% LTA remains. 

Triumph13

It was always only a matter of time before those with the much superior DB schemes noticed that the people with DC schemes got to leave something to their kids to make up for their pension incomes being generally lower and more uncertain and cried foul...