Inheritance Tax on pensions - budget announcement and consultation

LHW99

I am now wondering if, assuming these rules come in as planned, whether naming beneficiaries of your pension in your will (rather than expression of wishes) would make any difference to taxation.

When done, the pension moneys would presumably be paid to the estate, which could at least eliminate the difficulties of liaison between PRs and the PA.

artyboy

LHW99 said:

I am now wondering if, assuming these rules come in as planned, whether naming beneficiaries of your pension in your will (rather than expression of wishes) would make any difference to taxation.

When done, the pension moneys would presumably be paid to the estate, which could at least eliminate the difficulties of liaison between PRs and the PA.

Why would the pension be paid to the estate? Unless I'm missing something, there is no proposed change to the trust structure of pensions, so it remains at the discretion of the trustees (guided by the expression of wishes) as to where the pension residue is paid.

Unless there's a wider overhaul of trust law, trustees can't be mandated to pay anywhere based on what is in a will?

marycanary

A few people in this thread have said that they intend to start providing gifts of money to their heirs.  These people might be interested in The Millionaire Next Door by Stanley and Danko.

The book reviews who are the millionaire in the USA, and their attitudes to money. One of their findings concerned parents gifting their adult children money, or what is termed "Economic Outpatient Care". The authors found that such a strategy can produce significant negative impacts on the recipients' future wealth.  It might be worth those thinking of gifting £k spending £15 on a copy to be aware of potential pitfalls and how they might be mitigated. 

DYOR, I read it about 15 years ago, so I could have misremembered and I no longer own a copy so I can't check. Also, it was a bit out of date even then and it refers exclusively to Americans. 

Sterlingtimes

marycanary said:

The book reviews who are the millionaire in the USA, and their attitudes to money. One of their findings concerned parents gifting their adult children money, or what is termed "Economic Outpatient Care". The authors found that such a strategy can produce significant negative impacts on the recipients' future wealth.  

It depends upon the behaviour of the behaviour of the adult children.

Three young adult men received a payout of £40,000 each from the Sterlingtimes Family Trust a few years ago.

The first son [my brother's] took a break from work for a couple of years, quickly depleting his money.

The second son [my brother's] used his money for general living expenses.

The third son [mine] invested £30,000 of his money in cryptocurrency, much to his father's anger, and ended up with £600,000 and a substantial CGT bill. Recently, he divested the lot and invested proceeds in technology stocks.

Yes, gifting money may be risky, but it isn't easy to give a gift and then prescribe that it must be used wisely.

Cus

zagfles said:

noitsnotme said:

zagfles said:

noitsnotme said:

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.

Any examples of threads suggesting that before the budget? I don't remember any. 

Are you saying people never debated the pros and cons of SIPPs vs annuity before the budget?  Maybe we’re talking cross purposes.

Err, the point is the pros and cons have changed! The suggestions are now different. You said "the same suggestions that have been made for years even before this budget". Can you find any? 

I think the attraction of current annuity rates and the comparison/impact of SWR drawdown at the moment to me shows more that the SWR concept is severely limited and basic, and is worth its own discussion. The fact that it's now 60% rather than 100% of a SIPP that can be free of IHT above a certain amount is just a smaller factor in the bigger debate.imo

clivep

I have never been a higher rate taxpayer and my wife stopped working in her 40s.We are now both c. 70. Having always been very frugal (e.g. we share a car and usually keep one for about 10 years), we have always tried to save in ISAs (PEPs initially) and pensions.

Other than our state pensions, neither of us has ever claimed any state benefits (which we are not eligible for as we've saved all our lives).

Due to good investment choices, there will be sufficient in the ISAs to pay for care home costs. Along with our house, the ISAs will have enough remaining for inheritance tax to be payable on 2nd death.

Our SIPPs  have grown to sizeable amounts and are not needed for retirement so expression of wishes were made for our son to be the beneficiary of these.

This budget now means that an additional 6 figure sum of inheritance tax will be payable on 2nd death.

Providing we both live to 75+, our son will also pay income tax when accessing the inherited pensions after inheritance tax. i.e. double taxation.

PLANS (as I currently see them)...

Take the 25% TFLS from the pensions (definitely before reaching 75).

Change our expression of wishes to make spouses the beneficiaries.

On 1st death, spouse gets pot free of inheritance tax.

Spouse then puts this pot into drawdown with regular income payments.

These income payments net of basic rate income tax are gifted to our son and exempt from inheritance tax as they are gifts from excess income.

Only what remains of this pot will be subject to inheritance tax on 2nd death.

 

Am I correct in my understanding of this?

 

Madeinireland101

clivep said:

I have never been a higher rate taxpayer and my wife stopped working in her 40s.We are now both c. 70. Having always been very frugal (e.g. we share a car and usually keep one for about 10 years), we have always tried to save in ISAs (PEPs initially) and pensions.

Other than our state pensions, neither of us has ever claimed any state benefits (which we are not eligible for as we've saved all our lives).

Due to good investment choices, there will be sufficient in the ISAs to pay for care home costs. Along with our house, the ISAs will have enough remaining for inheritance tax to be payable on 2nd death.

Our SIPPs  have grown to sizeable amounts and are not needed for retirement so expression of wishes were made for our son to be the beneficiary of these.

This budget now means that an additional 6 figure sum of inheritance tax will be payable on 2nd death.

Providing we both live to 75+, our son will also pay income tax when accessing the inherited pensions after inheritance tax. i.e. double taxation.

PLANS (as I currently see them)...

Take the 25% TFLS from the pensions (definitely before reaching 75).

Change our expression of wishes to make spouses the beneficiaries.

On 1st death, spouse gets pot free of inheritance tax.

Spouse then puts this pot into drawdown with regular income payments.

These income payments net of basic rate income tax are gifted to our son and exempt from inheritance tax as they are gifts from excess income.

Only what remains of this pot will be subject to inheritance tax on 2nd death.

 

Am I correct in my understanding of this?

 

Sounds like a good plan to me and similar approach will be taken by me although I will be attempting to get the estate under £1m if possible so that any remaining SIPP is either extracted by my wife (assuming she pays no more than 20% tax) or will be passed to children tax free so that they can extracted it at 20% or less tax or onward pass to their children 😀

Ciprico

I am retired but haven't touched my large sipp pot yet..

So I have a lot to think about like many on here..

..when the dust settles would it be prudent to take the 25% tfls "soon", to avoid that sum being hit by 40% iht in the event of a sudden unexpected death....?

Or would the 25% tfls be preserved after the death transfer..?

Triumph13

Cus said:

zagfles said:

noitsnotme said:

zagfles said:

noitsnotme said:

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.

Any examples of threads suggesting that before the budget? I don't remember any. 

Are you saying people never debated the pros and cons of SIPPs vs annuity before the budget?  Maybe we’re talking cross purposes.

Err, the point is the pros and cons have changed! The suggestions are now different. You said "the same suggestions that have been made for years even before this budget". Can you find any? 

I think the attraction of current annuity rates and the comparison/impact of SWR drawdown at the moment to me shows more that the SWR concept is severely limited and basic, and is worth its own discussion. The fact that it's now 60% rather than 100% of a SIPP that can be free of IHT above a certain amount is just a smaller factor in the bigger debate.imo

I agree that the IHT issue and the improved annuity rates will move the dial for some.  Drawdown is still very attractive for early retirees though - the rates for indexed annuities with 100% survivor's pension for a 55 year old are not still very attractive!

Albermarle

artyboy said:

LHW99 said:

I am now wondering if, assuming these rules come in as planned, whether naming beneficiaries of your pension in your will (rather than expression of wishes) would make any difference to taxation.

When done, the pension moneys would presumably be paid to the estate, which could at least eliminate the difficulties of liaison between PRs and the PA.

Why would the pension be paid to the estate? Unless I'm missing something, there is no proposed change to the trust structure of pensions, so it remains at the discretion of the trustees (guided by the expression of wishes) as to where the pension residue is paid.

Unless there's a wider overhaul of trust law, trustees can't be mandated to pay anywhere based on what is in a will?

What you say is correct as I understand it.
In future the pension pot will remain in trust, but new legislation will mean it can be included in IHT calculations, but not included in a will. 
Currently a pension pot can be paid into an estate, but it is very unusual and I presume will remain so .
There is some discussion of it here.
Sipp And Wills — MoneySavingExpert Forum