Inheritance Tax on pensions - budget announcement and consultation

coey

So at age 66 after planning my old age carefully my estate [ partner and childrens future ] will suddenly be liable to £120k IHT from 2027......the current IHT rules were the driving force for my decision to transfer my DB pension to a DC pot when retiring early 7 years ago.

Sarahspangles

[Deleted User] said:

Qyburn said:

coyrls said:

Saving in a pension is for income in retirement.  None of the measures announced will have any effect on income in retirement.

Spot on. All this wailing "a pension is now a waste of time" is from people misusing the pension regime as IHT avoidance rather than retirement planning.

Pensions are great.  But it's quite hard to make sure that a DC pension will run out of money on the day you die (and not before).  So, on average people who are prudent with their DC pension will be money left in it at the end.  Hopefully, they'll be old when that happens but they could die younger than they hoped. 

Let's look at the numbers.  Say you got basic rate tax relief on the money going into the pensions but you have more than £325,000 of assets (including what's left of your pension).  A nice situation to be in.  That top bit of your pension that causes you to go over the £325,000 threshold will be taxed at 40% and what's left taxed at 20% (if your kids are basic rate taxpayers).  That's a 52% marginal tax rate (but could be more).  So now we are at the stage of asking whether it is worth getting 20% tax relief to (i) pay 15% tax if you take the money out, or (ii) your family paying at 52% when you die old.

In the old fashioned times that wasn't an issue.  

People used to buy annuities, so their pension couldn’t run out. 

FIREDreamer

Sarahspangles said:

[Deleted User] said:

Qyburn said:

coyrls said:

Saving in a pension is for income in retirement.  None of the measures announced will have any effect on income in retirement.

Spot on. All this wailing "a pension is now a waste of time" is from people misusing the pension regime as IHT avoidance rather than retirement planning.

Pensions are great.  But it's quite hard to make sure that a DC pension will run out of money on the day you die (and not before).  So, on average people who are prudent with their DC pension will be money left in it at the end.  Hopefully, they'll be old when that happens but they could die younger than they hoped. 

Let's look at the numbers.  Say you got basic rate tax relief on the money going into the pensions but you have more than £325,000 of assets (including what's left of your pension).  A nice situation to be in.  That top bit of your pension that causes you to go over the £325,000 threshold will be taxed at 40% and what's left taxed at 20% (if your kids are basic rate taxpayers).  That's a 52% marginal tax rate (but could be more).  So now we are at the stage of asking whether it is worth getting 20% tax relief to (i) pay 15% tax if you take the money out, or (ii) your family paying at 52% when you die old.

In the old fashioned times that wasn't an issue.  

People used to buy annuities, so their pension couldn’t run out. 

They still can.

I did. 😀

Madeinireland101

[Deleted User] said:

Qyburn said:

coyrls said:

Saving in a pension is for income in retirement.  None of the measures announced will have any effect on income in retirement.

Spot on. All this wailing "a pension is now a waste of time" is from people misusing the pension regime as IHT avoidance rather than retirement planning.

Pensions are great.  But it's quite hard to make sure that a DC pension will run out of money on the day you die (and not before).  So, on average people who are prudent with their DC pension will be money left in it at the end.  Hopefully, they'll be old when that happens but they could die younger than they hoped. 

Let's look at the numbers.  Say you got basic rate tax relief on the money going into the pensions but you have more than £325,000 of assets (including what's left of your pension).  A nice situation to be in.  That top bit of your pension that causes you to go over the £325,000 threshold will be taxed at 40% and what's left taxed at 20% (if your kids are basic rate taxpayers).  That's a 52% marginal tax rate (but could be more).  So now we are at the stage of asking whether it is worth getting 20% tax relief to (i) pay 15% tax if you take the money out, or (ii) your family paying at 52% when you die old.

In the old fashioned times that wasn't an issue.  

Yes and that’s all before the Gov takes the next step and reduces the tax free lump sum or something like that. 

zagfles

LHW99 said:

Albermarle said:

LHW99 said:

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?

My reading of the info is that the trust status of a DC  pension pot will stay. So presumably it will not be included in a will, and you will still have to nominate beneficiaries.
The legislation is to allow that pension in trust be included in IHT calculations, not to put it in the estate as such.
That is only my thoughts though.

What I can't quite get my head around is the idea that it can remain "not part of the estate", and yet be brought into the IHT regime - which I thought required aggregating all "wealth" and calculating what IHT if any was due.

If the remaining pension is to be added in to the IHT calculation, then ISTM that it effectively becomes "part of the estate",

If it quacks like a duck ......... etc

Same as jointly owned property (beneficial joint owners). It's not part of the estate, but included in IHT calculations. 

zagfles

DRS1 said:

coyrls said:

DairyQueen said:

I note that the IHT umbrella will also include death benefits (DB and DC schemes).

I am confused about the contents of Annex B of the consultation document.: 'Authorised Pension Death Benefits included in the value of an individual’s estate for Inheritance Tax from 6 April 2027". This table suggests that dependants' annuities will also be included within the IHT umbrella. Does this mean that, for example, income from an annuity bought via a DC/SIPP, which included a spousal pension, would somehow be valued for IHT purposes on the death of the main annuitant?

I doubt it because there is no IHT for transfers to spouses.

Yes but what if the annuity is not for a spouse?  And even if it is for a spouse do you have to value it to include it in the IHT calculation before you conclude there is no IHT on it?  How do you value that part of the annuity when what was bought originally was a joint lives annuity?

And how is it fair that a Dependants Scheme Pension is outside the IHT net?  How is that different?

Dependants scheme pensions are taxable on death at any age, so have always been treated differently. 

zagfles

SkylineExplorer said:

It seems this change could simplify things for those leaving pensions to spouses, but it definitely raises concerns for non-traditional family structures.

It will be interesting to see if further clarifications or amendments address unmarried partners and other modern family dynamics, especially as so many fall outside the 'married spouse' model. A lot of us are hoping for more flexibility in the final guidance

Why? That's IHT rules, and applies to all other assets, property etc, so why would including pensions change anything? If you want to leave your estate tax free to your partner, the obvious solution is to get married. As it always has been. There's no way they're going to have specific "unmarried partners" exemption to the pensions element of IHT. It'd be to IHT generally if they do it. But unlikely. 

6022tivo

coey said:

So at age 66 after planning my old age carefully my estate [ partner and childrens future ] will suddenly be liable to £120k IHT from 2027......the current IHT rules were the driving force for my decision to transfer my DB pension to a DC pot when retiring early 7 years ago.

I'm in a similar situation and yes without warning, our family are hit with a 6 figure bill to support the governments expansion and rebuilding for the extra influx of people into the UK.

ukdw

If you withdraw it within the 40% band over a few years and regularly gift it out of excess income then I don't think it will be liable for IHT even if you expire within 7 years.

Madeinireland101

coey said:

So at age 66 after planning my old age carefully my estate [ partner and childrens future ] will suddenly be liable to £120k IHT from 2027......the current IHT rules were the driving force for my decision to transfer my DB pension to a DC pot when retiring early 7 years ago.

Long term planning is not possible now when everything changes so often. I know several people who took the same approach and transferred out of our DB pension. I looked on with some element of envy whilst they did it but it seems I may have dodged a bullet there. Hopefully you will still do OK out of it and of course the rules could just as easily change again when the Gov changes.