Inheritance Tax on pensions - budget announcement and consultation

RogerPensionGuy

A nice link below for some interest in this thread. 

***

https://www.telegraph.co.uk/money/tax/inheritance/public-sector-pensions-rachel-reeves-inheritance-tax-raid/

najan49

Linton said:

ukdw said:

Linton said:

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.

Guaranteed annuities can be inherited if the purchaser dies before the guarantee has expired. Fairly long guarantees such as 30 years are available.

 How is such a guaranteed annuity taxed? If it goes to the deceased’s estate as a lump sum it would come under IHT or if it goes to the beneficiary it would be taxed as income just like a spouses DB pension or spouses benefits from an annuity.  So I don’t see any difference in principle. The guaranteed annuity itself is not an inheritance.

Guaranteed annuities are already included in IHT calculations:

https://www.gov.uk/government/publications/inheritance-tax-guaranteed-annuity-calculator

zagfles

noitsnotme said:

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?

They could use other assets for the kids. ISAs, property etc. Or they could give the kids part of the annuity income. There've been plenty of threads here where people have talked about drawing down at a rate of well under what an index linked annuity would pay them, so they'll have spare income. And gifting from income is IHT free usually. Or, with a guaranteed income, they may be more willing to gift early from ISAs etc, so they can hopefully survive 7 years so they pass IHT free. 

noitsnotme

zagfles said:

noitsnotme said:

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?

They could use other assets for the kids. ISAs, property etc. Or they could give the kids part of the annuity income. There've been plenty of threads here where people have talked about drawing down at a rate of well under what an index linked annuity would pay them, so they'll have spare income. And gifting from income is IHT free usually. Or, with a guaranteed income, they may be more willing to gift early from ISAs etc, so they can hopefully survive 7 years so they pass IHT free. 

As I said above to someone else, drawdown from the SIPP and gift from that.  Might still be funds left in the SIPP at death for inheritance.  Might die early before an annuity pays back the original investment and nothing for inheritance on death.

zagfles

noitsnotme said:

zagfles said:

noitsnotme said:

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?

They could use other assets for the kids. ISAs, property etc. Or they could give the kids part of the annuity income. There've been plenty of threads here where people have talked about drawing down at a rate of well under what an index linked annuity would pay them, so they'll have spare income. And gifting from income is IHT free usually. Or, with a guaranteed income, they may be more willing to gift early from ISAs etc, so they can hopefully survive 7 years so they pass IHT free. 

As I said above to someone else, drawdown from the SIPP and gift from that.  Might still be funds left in the SIPP at death for inheritance.  Might die early before an annuity pays back the original investment and nothing for inheritance on death.

Or they could run out of money in the SIPP at 80 and live to 100. Unless they drawdown at such a safe rate that that is unlikely - in which case may as well buy an annuity which will pay a much higher income, and gift from that. 

noitsnotme

zagfles said:

noitsnotme said:

zagfles said:

noitsnotme said:

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?

They could use other assets for the kids. ISAs, property etc. Or they could give the kids part of the annuity income. There've been plenty of threads here where people have talked about drawing down at a rate of well under what an index linked annuity would pay them, so they'll have spare income. And gifting from income is IHT free usually. Or, with a guaranteed income, they may be more willing to gift early from ISAs etc, so they can hopefully survive 7 years so they pass IHT free. 

As I said above to someone else, drawdown from the SIPP and gift from that.  Might still be funds left in the SIPP at death for inheritance.  Might die early before an annuity pays back the original investment and nothing for inheritance on death.

Or they could run out of money in the SIPP at 80 and live to 100. Unless they drawdown at such a safe rate that that is unlikely - in which case may as well buy an annuity which will pay a much higher income, and gift from that. 

So nothings really changed after all 🤷‍♂️

zagfles

noitsnotme said:

zagfles said:

noitsnotme said:

zagfles said:

noitsnotme said:

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?

They could use other assets for the kids. ISAs, property etc. Or they could give the kids part of the annuity income. There've been plenty of threads here where people have talked about drawing down at a rate of well under what an index linked annuity would pay them, so they'll have spare income. And gifting from income is IHT free usually. Or, with a guaranteed income, they may be more willing to gift early from ISAs etc, so they can hopefully survive 7 years so they pass IHT free. 

As I said above to someone else, drawdown from the SIPP and gift from that.  Might still be funds left in the SIPP at death for inheritance.  Might die early before an annuity pays back the original investment and nothing for inheritance on death.

Or they could run out of money in the SIPP at 80 and live to 100. Unless they drawdown at such a safe rate that that is unlikely - in which case may as well buy an annuity which will pay a much higher income, and gift from that. 

So nothings really changed after all 🤷‍♂️

Eh? Of course it has - we're both suggesting ways people might change the way they pass money on!

bjorn_toby_wilde

I’m still not buying the idea that an annuity is a better option, given the lock in and lack of flexibility.

You may be right but I really don’t see the death of drawdown and the rise of annuities just yet.

Notepad_Phil

noitsnotme said:

zagfles said:

noitsnotme said:

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?

They could use other assets for the kids. ISAs, property etc. Or they could give the kids part of the annuity income. There've been plenty of threads here where people have talked about drawing down at a rate of well under what an index linked annuity would pay them, so they'll have spare income. And gifting from income is IHT free usually. Or, with a guaranteed income, they may be more willing to gift early from ISAs etc, so they can hopefully survive 7 years so they pass IHT free. 

As I said above to someone else, drawdown from the SIPP and gift from that.  Might still be funds left in the SIPP at death for inheritance.  Might die early before an annuity pays back the original investment and nothing for inheritance on death.

Possibly, but wouldn't you need to keep a lot of records to prove that the drawdown hadn't come from capital - so if you're only drawing down the dividends from the sipp funds then a record of that would be fine, but if you're drawing down by selling units then I'd have thought that could be an issue.

You seem to suggest running the sipp down to as close to zero as possible, but I would think that surely would be counted by the hmrc as dipping into capital, and hence is not income. 

noitsnotme

zagfles said:

noitsnotme said:

zagfles said:

noitsnotme said:

zagfles said:

noitsnotme said:

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?

They could use other assets for the kids. ISAs, property etc. Or they could give the kids part of the annuity income. There've been plenty of threads here where people have talked about drawing down at a rate of well under what an index linked annuity would pay them, so they'll have spare income. And gifting from income is IHT free usually. Or, with a guaranteed income, they may be more willing to gift early from ISAs etc, so they can hopefully survive 7 years so they pass IHT free. 

As I said above to someone else, drawdown from the SIPP and gift from that.  Might still be funds left in the SIPP at death for inheritance.  Might die early before an annuity pays back the original investment and nothing for inheritance on death.

Or they could run out of money in the SIPP at 80 and live to 100. Unless they drawdown at such a safe rate that that is unlikely - in which case may as well buy an annuity which will pay a much higher income, and gift from that. 

So nothings really changed after all 🤷‍♂️

Eh? Of course it has - we're both suggesting ways people might change the way they pass money on!

Yes, the same suggestions that have been made for years even before this budget.