Inheritance Tax on pensions - budget announcement and consultation

dunstonh

I’m sure my pension fund provider Legal & General don’t allow you to keep pension invested when I die and will pay my wife out in a lump sum aka £250,000.

Most L&G pensions will also allow transferring the pension and is not just return of fund.    However, some schemes do not.

Bolt1234

So what if wife wants to take out that tax free money and give it to say a grown up child.    What would happen then?

Its all very well being tax free but if you are taxed when you take out then it is TAXED unless I have missed something.  Its like seeing a lovely piece of cake and not being allowed to take it.

Moonwolf

Bolt1234 said:

So what if wife wants to take out that tax free money and give it to say a grown up child.    What would happen then?

Its all very well being tax free but if you are taxed when you take out then it is TAXED unless I have missed something.  Its like seeing a lovely piece of cake and not being allowed to take it.

Once you take it out of your pension then it is part of your estate.  If you took out your TFLS and say gave it to your child to buy a house then it would be a gift under IHT rules so could be subject to IHT for the first seven years.

I assume that if you ran out of money later on and needed care there might be deprivation of assets issues as well. You aren't supposed to give away all your money then beg the state for help.

Sterlingtimes

Is this correct: After both parents die, the residual pension is £500,000. Say IHT reduces this to £300,000. Income tax falls due on the £300,000 at 20, 40 or 45%. A child taking this immediately could receive £300,000 x .55 = £165,000

So the child has received £165,000 of a £500,000 pension.

Early_Retire_Free

What I can deduce from the budget is that the likelihood of me owning a Ferrari has increased significantly.

Qyburn

Bolt1234 said:

Its all very well being tax free but if you are taxed when you take out then it is TAXED unless I have missed something.  Its like seeing a lovely piece of cake and not being allowed to take it.

If you're referring to an inherited DC pot under the current regime, then it would have been taxed as and when the original pensioner drew from it. I don't see anything wrong with that continuing after it's been inherited.

Under the proposed but so far unexplained regime it might well be different. If someone inherits a DC pot and has to immediately pay 40% of the pot as IHT, would they then be additionally taxed at their marginal rate if they drew any of the remaining 60%?

coyrls

My estate will be liable for IHT.  My current expression of wishes gives a percentage of my DC fund to my wife and a percentage to my son.  After 2027, I guess it will make more sense for my expression of wishes to be 100% to my wife and I should agree with my wife that following my death (assuming I die first), she should gift money to my son and ensure that she lives for a further 7 years.

LHW99

So currently, you make an expression of wishes for a DC pension, and it's not in your estate.

If you bequeath the pension by including it in your will, it will be reckoned with the estate and subject to IHT.

So after April 2027, will it matter which way you choose to say who you want the pension to go to?

MallyGirl

coyrls said:

My estate will be liable for IHT.  My current expression of wishes gives a percentage of my DC fund to my wife and a percentage to my son.  After 2027, I guess it will make more sense for my expression of wishes to be 100% to my wife and I should agree with my wife that following my death (assuming I die first), she should gift money to my son and ensure that she lives for a further 7 years.

that is how I read it.

poseidon1

HappyHarry said:

Bolt1234 said:

So the under 75/over 75 rule is going in April 2027? 

Pensions will  all be treated as part of your estate to leave to your wife BUT maybe Labour will decide that pensions are different within your estate and will tax accordingly.  A very dangerous position to play because what will be next that you leave to your wife  but is still subject to IHT?  ISA's, second homes, their share of the family house (very unlikely but they are tax grabbing!)

No - the under / over 75 rule applies to income tax and is remaining. If you die before 75 then your beneficiary can draw their inherited pension funds free from income tax, but if you’re over 75 when you die then your beneficiaries will pay income tax on any withdrawals they make from their inherited pension.

The consultation quite strongly implies that pension funds will attract IHT at 40% (to be paid direct from the pension fund) and a spouse’s exemption exists as per other assets.

Not quite my reading of the Technical consultation.

A full 40%  IHT charge on the pension fund only likely if the deceased's nil rate band has been fully utilised elsewhere within the primary estate. Otherwise, the pension fund shares a proportion of the NRB, and pays tax on the excess of that proportion.

A couple of the worked examples in the Tech Doc supports this. 

However there is some uncertainty as to what happens where the pension scheme hear of the death, but have heard nothing at all from the personal representatives ( possibly in the case of intestate estates where no PRs come forward with details of the estate). Will HMRC expect the pension scheme to assume no NRB and pay 40% within the 6 months deadline? 

This and other potential complications seems to be what the consultation is all about so no doubt all the trade bodies ( Law Society, Institute of Chartered Accountants, Society of Pension Providers etc) will all make their representations and suggestions.

What is for sure, and as mentioned elsewhere on this forum, pension scheme admin costs will almost certainly rise to cover extra staffing, training and administration of this new IHT compliance regime the change will necessitate.

Those of us with SIPPs ( DIY or otherwise), will need to be alert to possible fee increases between now and 2027.

Looking further ahead, ensuring executors have what they need to quickly identify , collate and access details of  ones assets and liabilities will become even more important given the expected new duty to liase closely with pension scheme trustees in determining IHT exposure.