Inheritance Tax on pensions - budget announcement and consultation

Tax_Slave

dunstonh said:

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.

I asked question to L&G and got a different answer to last time I asked question via a phone call.
This time they said;

“I have had a look and found that in the event of your death, your wife would have the option of taking your pension pot as a lump sum payment, a beneficiary drawdown, an annuity or transferring out to another pension. If she is under 75 and she claims the pension within 2 years, it will be tax-free. If she is over 75, it will be subject to income tax”

Not sure what they mean by her age being 75?
I thought that was me the pension holder and death prior to 75 or after.

Albermarle

DairyQueen said:

Hi Madeinireland101 said:

I've currently got an expression of wish on my 2 DC pensions saying 50% to my wife and 25% to each of the children.

1. if I’m reading this all correctly it appears I’d be better off combining the schemes and changing the EOW to put 100% to my wife. Is that correct?

2. Also it appears to me that there is no point in keeping the money in a pension at all now - may as well start by extracting the tax free 25% by £40k a year and putting it in two ISA’s for me and the wife. Then extracting the rest gradually up to the 40% limit to wind the pensions down completely if I can. Might be worth keeping anything that might result in 40% tax as if I pass it eventually to kids then they might have a lower tax bracket to use.

3. Will now also look to use gifting to give away as much as possible to the kids too. Pensions appear to be finished from my point of view unless someone can tell me the benefit of keeping one? ISA’s will be more flexible.

We are thinking along the same lines.

Problem being that unwrapping the pension will likely incur income tax, and that ISAs will still form part of your estate. Whether to leave wrapped will depend on the identity of the beneficiary and whether you/they would incur more tax.

For example, if you are under 75 and spouse is 100% beneficiary then s/he will inherit free of IHT and income tax if you die before your 75th birthday. If, OTOH, you are a widow/er/single and are over 75 then your pension could be subject to a heinous IHT tax charge and then subject to additional (income) tax on-top by beneficiaries when they drawdown.

Our inheritance plans are totally screwed by this budget. We are not wealthy but we were hoping to leave a reasonable sum to my nephews and to OH's daughters and grandson. They are the generation that will suffer. 

Socialists hate inherited wealth but, Lord's sake, is it really necessary to destroy Millennials and Gen Z's inheritance in this way? 

Or you could look at if another way.
Govt provides tax relief to encourage people to save for their retirement. Higher earners benefit more than lower earners, but then some do not need to take from the pension due to having significant other assets/income.
Relatively wealthy person then uses pension pot ( bloated with free money from the Govt) to avoid IHT.
Govt blocks the loophole.
No big surprise!

Triumph13

If they leave the rules for gifts from income unchanged, presumably now the best option is to establish a gifting pattern (amounts don't matter) then when you get a terminal diagnosis withdraw the lot and gift it.  Even if that attracts 45% tax that is still way better than the 52% if your kids are 20% taxpayers or 64% if they are 40%

CSL0183

How are death in service life assurance policies usually treated today within a pension wrapper?

I currently pay 11%, my employer pays 10% + 1% for a life assurance policy that gives me 5 x my annual wage in the event of my death. 

I am 40yrs old, have an £80k pensionable salary and have got around £300k in my fund at the moment. 

I have a longterm partner and a house worth about £500k with a £250k mortgage. 

Am I right in thinking that if I was to drop down dead (post April 2027) I would have a liability of 5x £80k + £300k (dismissing increases between now and then) 

My estate would be worth £700k so I would be liable for IHT on £375k (£325k threshold) @ 40% which would be £150k IHT due. The £550k remaining is passed to my kids tax free or to be paid at their marginal tax rates? 



I can see a lot falling foul of £325k especially if life assurance policies like mine are included. Even a £40k earner would likely breach £325k in a pension pot + life assurance. 

I may be misunderstand this though?

RogerPensionGuy

Is the below possible. 

I take out say 1M from my DC pot and say pay 40% income tax on it, so 600K.

I give that 600K to a child for example. 

I expire 2 months later and that 600K is in my estates IHT. 

So 40% of that 600K needed to pay of the government. 

So 600K minus 240K.

So in those few months, 1M becomes 360K.

Thats an effective tax rate of 64% if the above is anywhere possible or correct. 

Bolt1234

So if they say your pension pot is tax free for your wife and she gives it to a grown up child who is paying 45% tax on their own job themselves that is bad enough. If they tax it even though left to your wife at 40% who then passes it to a son paying 45% tax then was the blooming hell is the incentive to even have a pension!

I have a couple of questions though

1.  What about a deed of variation when pension pot comes to wife who then immediately passes to child under the will.  Will the child’s sum be immediately subject to their own rate of tax.  

2.  Or wife inherits the pot tax free and immediately gifts say £300k to grown up son and wife lives 7 years?

artyboy

[Deleted User] said:

Triumph13 said:

If they leave the rules for gifts from income unchanged, presumably now the best option is to establish a gifting pattern (amounts don't matter) then when you get a terminal diagnosis withdraw the lot and gift it.  Even if that attracts 45% tax that is still way better than the 52% if your kids are 20% taxpayers or 64% if they are 40%

Not commenting on the best option but the numbers could be worse. Imagine someone with a £2m estate (hard life) and they have £100,000 in a SIPP.  £60,000 of IHT would be due in relation to the £100,000, leaving £40,000.  A 45% taxpayer kid would end up with £22,000.  So a 78% marginal rate.

I'm still catching up on the specifics, but does that calculation take into account the tapering off of the additional nil-rate band once your estate exceeds £2m?

As you say, hard life, but the strong likelihood is that this is exactly where Mrs Arty and I will end up (or rather our kids will) as a result of residual pension pots getting counted for IHT. Feeling a bit battered right now...

Bolt1234

This is from the Telegraph Money section:

 Furthermore, Ms Moffatt said it is important to remember that if you pass your pension on to your wife, husband or civil partner, it will still be inheritance tax-free. 

So, maybe what has changed is that any withdrawals will be subject to whatever tax the receiptant pays?  

Sea_Shell

Sounds like it's possibly going to make an executor's job more onerous.

Especially if 40% is auto-deducted at source, and has to be reclaimed if the estate isn't actually liable for IHT.

CSL0183

Labour are in to 2029, this is effective from 2027

Suspect as soon as the Tories get back in this will be scrapped. £325k isn’t a lot of money to leave as an inheritance if you have a few kids and grandkids. A decent amount granted but not all that much spread across a few people. 

If you die before the age of 75, is the leftover money further taxed or is this tax free? I gather after 75 it would be taxed again at recipients marginal rate but what about before 75?