Inheritance Tax on pensions - budget announcement and consultation

Albermarle

CSL0183 said:

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?

In which case you may not want to know that with the bookies, Labour are favourites to win the next election.

zagfles

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.

I think you'd pay more inheritance tax but usually less tax overall. But there could be cases where more tax overall is paid, an example may be where the TFLS hasn't been taken and the member died over 75. 

SnowMan

fuzzzzy said:

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?

If even after allowing for tax free cash your beneficiary ends up paying a higher average rate of tax on the pension than the rate of tax relief on the way in then it would be a worse off scenario than if they had just say put the money in an ISA. Assuming identical returns etc.

It would be a very unusual scenario indeed. Even if the beneficiary was a higher rate taxpayer now they might not be in retirement when they take the money out. 

In that scenario the person with the pension might want to take money out of their pension as quickly as possible on retirement (while being carefully not to take out too much in any year to go into higher rate tax) and then put the excess they don't need to cover expenditure into an ISA.  

michaels

Slightly OT but does it make sense to skip a generation on inheritance if the odds are the money will be passed down again rather than spent?

JustJ12345

Pat38493 said:

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.

Lots of civil servants do this. It is a standard part of their DB scheme. 

I know lots of people who have done it.

There is also a separate lump sum form.

bjorn_toby_wilde

SnowMan said:

fuzzzzy said:

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?

If even after allowing for tax free cash your beneficiary ends up paying a higher average rate of tax on the pension than the rate of tax relief on the way in then it would be a worse off scenario than if they had just say put the money in an ISA. Assuming identical returns etc.

It would be a very unusual scenario indeed. Even if the beneficiary was a higher rate taxpayer now they might not be in retirement when they take the money out. 

In that scenario the person with the pension might want to take money out of their pension as quickly as possible on retirement (while being carefully not to take out too much in any year to go into higher rate tax) and then put the excess they don't need to cover expenditure into an ISA.  

Or give it to the intended beneficiaries to pay into their pensions?

JustJ12345

JustJ12345 said:

Pat38493 said:

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.

Lots of civil servants do this. It is a standard part of their DB scheme. 

I know lots of people who have done it.

There is also a separate lump sum form.

Your declaration

We confirm the following:

• Our financial affairs are interdependent (or either one of us is financially dependent on the other).
• We have a committed relationship with each other and we intend to continue this indefinitely.
• We are mutually responsible for each other’s welfare.
• We are not related in a way that will prevent either marriage or civil partnership.
• Neither of us is married to or in a civil partnership with anyone else.
• Neither of us is currently nominated as the partner of anyone else.
• We will inform the scheme administrators if our relationship comes to an end.
• We understand that benefits will not be paid unless the partner provides satisfactory evidence that the declaration above is valid when the scheme member dies.

 

Pat38493

JustJ12345 said:

JustJ12345 said:

Pat38493 said:

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.

Lots of civil servants do this. It is a standard part of their DB scheme. 

I know lots of people who have done it.

There is also a separate lump sum form.

Your declaration

We confirm the following:

• Our financial affairs are interdependent (or either one of us is financially dependent on the other).
• We have a committed relationship with each other and we intend to continue this indefinitely.
• We are mutually responsible for each other’s welfare.
• We are not related in a way that will prevent either marriage or civil partnership.
• Neither of us is married to or in a civil partnership with anyone else.
• Neither of us is currently nominated as the partner of anyone else.
• We will inform the scheme administrators if our relationship comes to an end.
• We understand that benefits will not be paid unless the partner provides satisfactory evidence that the declaration above is valid when the scheme member dies.

 

Seems clear then - with my private company DB scheme I was told that dependents basically means children below a certain age.

Bolt1234

What stops a spouse taking the pension pot tax free under the spousal exemption and then using a Deed of Variation to pass to say a son if they didn’t need the money after 2027.

 A couple who has a largely unused large pension pot is likely to have other assets, mortgage free home and then it never touches the surviving parents estate.

JustJ12345

zagfles said:

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. 

Thanks, I was wondering what "Dependent scheme pension" covered.

I do wonder if some DC schemes will switch to Dependent scheme pensions where there is a named dependent rather than leave it discretionary. I see the consultation includes DC and DB in that Dependent Pension exclusion.