Inheritance Tax on pensions - budget announcement and consultation

Notepad_Phil

zagfles said:

...
What is now the point of using drawdown with a "SWR" of 4%, or even 3.5% or less as some believe, when you can get an index linked annuity at 4.7% at 65. The usual answer you'd get in the past was "I want to leave the kids an inheritance". Well that motivation has been pretty much decimated!

There's also the potential of delaying a state pension and drawing from the DC asset instead - we've been thinking about this for Mrs Notepad who only has a small DB pension so could use a big chunk of her personal allowance to drawdown income tax-free from her sipp.

There's a few years before we need to make any decisions, but these IHT changes have definitely made me think more about when I'm no longer around and the benefits of state pension deferral combined with index-linked annuities for someone who is less interested in things like SWR that I am.

This new IHT change has also brought in a new concern for me: what happens if there is a big market drop just after the DC pension is passed on to a non-spouse? E.g. say it's worth one million pounds at point of death, so IHT means £400k is owed, but a market drop of 25% happens over a month or so before anything can be done, so now there's only £750k in the DC pension to pay the £400k that's owed.

Currently I'm quite aggressively into equities, but that would likely need to change if we stayed with our DC pensions to try to limit such potential losses, which is where again something like an annuity if bought using the DC fund could just completely get rid of the issue and we could simply gift out of our income instead. 

noitsnotme

zagfles said:

I suspect this will lead to the slow death of drawdown and a boom in annuities. Particularly with gilt prices falling (ie yields increasing), they're getting close to the bottom of the dip during the Truss farce! So annuities have become better value. 

What is now the point of using drawdown with a "SWR" of 4%, or even 3.5% or less as some believe, when you can get an index linked annuity at 4.7% at 65. The usual answer you'd get in the past was "I want to leave the kids an inheritance". Well that motivation has been pretty much decimated!

Someone wants to leave the kids something, but aggrieved at having to pay tax that reduces the kids inheritance, takes an annuity instead that leaves the kids nothing?  Am I missing something because that sounds counter productive?

tim9333

leosayer said:

By my estimation, based on our current assets, if my wife and I die now then our estate would attract a £80k IHT bill.

After the change announced in the budget, the IHT bill would increase to £340k due to our pension pots.

Of course, if we deplete our pension pots during retirement as planned, then this will reduce the IHT bill. However if we die young then the full £340k will be payable.

I'm sure some will see this as a tax on dying young, but of course the reason would be that by dying young, we would leave a much larger inheritance.

If one of you dies under 75, they can pass their pension pot free of IHT to the remaining spouse

That spouse can then pass this pot directly to any dependents and, presuming they live another 7years, this will fall out of any IHT liability.

So a pot that has an expression of wishes split between spouse & children would be better left as 100% spouse

That’s my understanding and am likely to make this change when we get clarity on the legislation

Albermarle

tim9333 said:

leosayer said:

By my estimation, based on our current assets, if my wife and I die now then our estate would attract a £80k IHT bill.

After the change announced in the budget, the IHT bill would increase to £340k due to our pension pots.

Of course, if we deplete our pension pots during retirement as planned, then this will reduce the IHT bill. However if we die young then the full £340k will be payable.

I'm sure some will see this as a tax on dying young, but of course the reason would be that by dying young, we would leave a much larger inheritance.

If one of you dies under 75, they can pass their pension pot free of IHT to the remaining spouse

That spouse can then pass this pot directly to any dependents and, presuming they live another 7years, this will fall out of any IHT liability.

So a pot that has an expression of wishes split between spouse & children would be better left as 100% spouse

That’s my understanding and am likely to make this change when we get clarity on the legislation

That is not correct.
All pension pots whenever you die will be counted towards any IHT liability.

However the beneficiary of a pension pot of someone who dies under 75, can be withdrawn with no income tax to pay, although as from April 2027 the pot might be smaller if the person dying was liable for IHT .

Albermarle

zagfles said:

I suspect this will lead to the slow death of drawdown and a boom in annuities. Particularly with gilt prices falling (ie yields increasing), they're getting close to the bottom of the dip during the Truss farce! So annuities have become better value. 

What is now the point of using drawdown with a "SWR" of 4%, or even 3.5% or less as some believe, when you can get an index linked annuity at 4.7% at 65. The usual answer you'd get in the past was "I want to leave the kids an inheritance". Well that motivation has been pretty much decimated!

That could be the case for people with a good level of assets.
I have never been minded towards an annuity ( helps that I have some DB provision) but will think about it more now, but no rush.
 However for people of more modest assets, they could still in many cases leave a pot after drawdown with no IHT to pay.

FIREDreamer

With £700k in an ISA and a property worth £300k so total non pension assets of £1M for a couple, annuitising a SIPP might be more sensible than drawdown now even if 40% income tax is taken from some of the annuity income? Buy joint life second death life cover from the annuity proceeds which should be outside one’s estate. Sensible?

Edit: Or maybe live on the ISA until you can get SIPP plus ISA plus property < £1m?

Early_Retire_Free

The immediate impact of the budget is that our exposure to IHT has increased by over £300k (we have £750k in DC pension assets and our total estate excluding those pension assets more than exceeds the available allowances).

Personally I don't see us gifting assets any earlier so avoiding the additional tax burden means increasing consumption.

I assume the government knows this and is relying on the additional spending as an economic boost (as opposed to the more obvious tax raising benefits)

MarzipanCrumble

I am a baby boomer aged 73.  I started a SIPP about 20 years ago but my main pension income is DB, annuity (deceased husband's) and deferred for 6 years, pre 2016 SP.  So I don't need my SIPP (currently around 250k).  I have not touched the SIPP and I add the £2880 annually.

Yes, in my IHT planning, it was to go to my 2 sons.  But, tbh, I really did think the whole IHT / pension thing was too good to be true.  (Just like Waitrose giving me a newspaper for free 7 days a week as long as I bought something there, which they have now ceased!)

I have an IFA and I will await their advice.  However it may be a strategy to buy an annuity and give away to both sons the regular payments excessive of income.  I do this already and have documented my spending showing that my outgoings do not exceed my incomings and that I have excess to save etc.

noitsnotme

MarzipanCrumble said:

However it may be a strategy to buy an annuity and give away to both sons the regular payments excessive of income.  

Why don’t you drawdown from the SIPP and give that income to the sons?  At least then there might still be something left for inheritance in the SIPP if it performs well or you die earlier than expected.  Assuming you spend the whole SIPP on an annuity, there would be nothing to leave for your sons.  And if you die earlier you may not realise the full benefit of what it cost in the first place.

Linton

JustJ12345 said:

I wonder how a DB benefit pension will be valued for IHT.

I would inherit a final salary pension entitlement from my partner if she died. We are not married  currently. But I am down as a dependent with her db pension scheme, so would get a small pension if she died.

So what value would be put on the pension income for IHT? 

A DB pension is not an asset that can be inherited.  It really is no different to an annuity, just an ongoing income that comes under income tax. The DB pension may include a pension for the spouse of the deceased, but that again is just a separate taxable income stream that a spouse receives in their own right not an inherited asset.