Inheritance Tax on pensions - budget announcement and consultation

Bolt1234

I agree re unmarried couples whom with respect could be someone you met a few weeks ago.

If you want to pass your estate on tax free then get married or a civil partnership.

SnowMan

[Deleted User] said:

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.  

You get tax relief on the pension as it goes in and usually if you take it out you incur a slightly lower rate of tax (allowing for tax free cash amongst other things). If you then die you pay inheritance tax on it. But the tax saving (= tax relief rate in less tax rate out) mitigates the estate inheritance tax bill.

Alternatively you get tax relief as it goes into the pension. You leave it in the pension, you die, and your dependants take it out incurring a slightly lower rate of tax than the tax relief you got on the way in (or no income tax if you die before age 75). Your estate pays inheritance tax on the amount in the pension but the tax saving (= tax relief rate in less tax rate out) mitigates that.

Either way you pay less inheritance tax than if the money hadn't gone into the pension and say had been put into an ISA until death, because of the tax saving.

Numerically I've given an example above of how that works.

6022tivo

I'm just going to get all my pension, pay the penalty and enjoy it for 10 years. 
Then when it comes to it, I'll get pension credit, and housing benefit until I'm too old to be useful and I'll head off and go the assisting dying route. 
I don't see the point to save and have a pension anymore. 

Pat38493

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.

It depends if you are married or in civil partnership with your partner - if yes, then they will get spousal exemption so they can still get your pension free from IHT.

If not, maybe consider doing so as if you are already above the IHT threshold, why would you want your partner to have to pay IHT?

For the children part, I would hope that if you took advice from a financial adviser, they would only have advised you to transfer out of the DB scheme if you had sufficient other sources of funding and/or the terms of transferring out where so beneficial that it made it worthwhile.  For a financial adviser to accept inheritcance planning as the main reason to transfer out a DB, they would presumably have to know that you have plenty of other money for your own retirement.

I would be somewhat surprised also if they wouldn't have warned you that there is no guaranteed that DC pensions will always remain outside of IHT.

Also - looking on the bright side, you can still pass on the remaining DC amount to children only that it might be after deduction of some amount of IHT, whereas with the DB pension they would have got nothing.

gm0

The devil is in the details.  As always.

There are situations where a "spouse" isn't the target beneficiary.  They exist. 

Some are just lifestyle multiple partner histories and anomalies of that sort. About what counts for spouse exemption.  Which will now matter more in sorting your family affairs along the way.  Ignoring the moved on but not sorted out who is married to who stuff crowd.  Not the corner I shall be fighting today.

But some are examples where generational transmission of wealth to vulnerable dependents of the next generation is a legitimate aim (to have used the prior beneficiary declaration for).  Such as with a vulnerable dependent child of a sole parent.

The specific niche where this is most pressing is the older surviving or long divorced adult who dies, or is diagnosed and will now die soon prematurely who is currently providing and/or organising care). A current fundamental assumption alongside self funding until asset depletion of the current system is that families do try to provide care themselves - in the first instance.  State intervention is more of the safety net rather than full provision for all variety. 
Caring for a dependent child with their own medical and other issues who is not expected to be capable of fully independent living (and earning to a fund a lifestyle potential) but now has (sudden death) or will outlive the parent (terminal illness).  There may or may not be personal representatives in extended family.  Situational.

Their prior expectation was to use the pension income to fund themselves to continue family care into retirement age for as long as health permitted.  That has not changed. 

But death has intervened and so has their plan. And so has the tax treatment.  Now the house lived in and the inherited assets (principally pension) must pay for all.

But now the state has decided to confiscate towards half of the DC pension money which was to be used for alternative care provision. Unless there is an exemption. 

They get thumped for 40% because of the house if it is anywhere south of a line somewhere in the midlands.  A house also adapted by their post tax private means. Where the individual receiving care still lives. 

A chunk of the pension is gone which was expected to pay for this care and other necessary support services (which as an outcome likely improves the care AND reduces the drain on the public purse).  Is confiscated. 

This is wrong.  And also needs attention in the details.

This specific edge case existing for a few families - does not mean ALL of the rest of us should get an inheritance tax planning wrapper to fill our boots on. 

And again resolvable like SSAS provided they are willing to open the gate *at all* - then define the situation where it applies crisply and narrowly.  This is tricky as the reason someone may be a vulnerable young orphaned adult in that position can arise from a wide range of (and combinations of) health conditions and other disabilities. So saying if you have X exempt.  And if you have Y.  40% please. Isn't an easy fix.  Nonetheless creativity needed.

JustJ12345

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? 

Pat38493

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? 

This is an interesting edge case that maybe needs to be covered in the ongoing consultations.

Also - has your partner actually confirmed with the pension trustees that this is likely to to work if she died?  In a lot of DB schemes, by "dependent" they mean children or some other financial depdnency, so just writing your partner's name who you are not married or in a civil partnership with in that box on the form may well not actually work, and you don't want to find that out too late.  If you have already taken advice on this then I guess it's fine, but if not be careful.

Albermarle

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.

You took a gamble that a rule ( pensions being exempt from IHT) would continue forever.
It is not a very logical rule so there was always a chance it might not survive for all time.
All financial decisions are never without risk.
I will also lose out ( or my heirs) will from this change, but it always felt like a bit of an unusually generous benefit in the first place.

zagfles

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? 

None. Dependant scheme pensions aren't included, only lump sums. 

Technical consultation - Inheritance Tax on pensions: liability, reporting and payment - GOV.UK 

fuzzzzy

SnowMan said:

[Deleted User] said:

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.  

You get tax relief on the pension as it goes in and usually if you take it out you incur a slightly lower rate of tax (allowing for tax free cash amongst other things). If you then die you pay inheritance tax on it. But the tax saving (= tax relief rate in less tax rate out) mitigates the estate inheritance tax bill.

Alternatively you get tax relief as it goes into the pension. You leave it in the pension, you die, and your dependants take it out incurring a slightly lower rate of tax than the tax relief you got on the way in (or no income tax if you die before age 75). Your estate pays inheritance tax on the amount in the pension but the tax saving (= tax relief rate in less tax rate out) mitigates that.

Either way you pay less inheritance tax than if the money hadn't gone into the pension and say had been put into an ISA until death, because of the tax saving.

Numerically I've given an example above of how that works.

What if you are single, have always been a basic rate tax payer, die after 75 and your beneficiary is a higher rate tax payer?