ISA vs SIPP - impact of IHT change

SnowMan

Sea_Shell said:

Qyburn said:

GunJack said:

As for it putting people off pension saving, that's more than a little naive considering most people can save quite happily and still not be near IHT...figures of around 7% of pots this will affect have been banded around in these discussions..

The consultation estimates 1.5% of deaths will pay some IHT solely because of their pension. Reverse engineering their figures another 5.5% would have been paying IHT in any case but will now pay more because of their pension. The don't give the number who will pay IHT but be unaffected.

Is 1.5% of deaths, actually 3% of households, as if married, first death doesn't attract IHT, so skews the figures 😉

And as I said up the thread, perhaps a good majority of the people who die in 2027/2028 will have accessed their pensions prior to 2015 when the pension freedoms came in. Consequently many of these will either have defined benefit pensions that end on death or on the death of their spouse, or annuities that end on their death or the death of their spouse. And most of the niche few who were using capped drawdown would have been aware of the 55% charge for pensions funds which remained unused at death, so would have been incentivised to extract monies out of the pension.

That's why in 2027/2028 only 1.5% of all deaths, or perhaps 3% of couples, if you allow for the spouse exemption, will become liable for inheritance tax because of this measure to introduce inheritance tax on pensions.

Over time these figures will increase as a good proportion of deaths will have at least one defined contribution pension that was accessed after 2015 and where the pension freedoms have been utilised and the pot has not been exhausted.

They don't give figures for later years just 2027/2028, so the statistic has been used to create an impression that fewer people will be affected by this measure than there actually will be in the long term.

Of course the loophole to avoid inheritance tax by parking money in the pension only opened up around 2015 so many of the losers are potential future gainers from the pension freedoms in 2015 who have now lost what they gained.

SnowMan

And following on my previous post had the inheritance tax position of pensions not changed, I suggest the majority of people with total assets above the inheritance tax threshold in the very long term would intentionally or unintentionally have been avoiding inheritance tax by way of the inheritance tax free nature of pension pots.
After all in the very long term, defined benefit pensions will have completely disappeared outside the public sector, few would have chosen to use all of their pensions to buy an annuity, and few would not have been using pensions to meet their main retirement needs.
I understand those affected are disappointed by this and face a significant new tax bill on death, but leaving aside thoughts on inheritance tax generally, who thinks things could have continued as they were with pension retaining beneficial treatment on death?

MK62

SnowMan said:

I understand those affected are disappointed by this and face a significant new tax bill on death, but leaving aside thoughts on inheritance tax generally, who thinks things could have continued as they were?

True enough, but opinions will vary wildly about what form any changes should take/should have taken, even beyond self interest.
Without venturing too far into the politics, it appears the new govt has hamstrung itself over the promises made on general taxation......but without those promises they may well not have been elected......rock and hard place and all!

Linton

MK62 said:

SnowMan said:

I understand those affected are disappointed by this and face a significant new tax bill on death, but leaving aside thoughts on inheritance tax generally, who thinks things could have continued as they were?

True enough, but opinions will vary wildly about what form any changes should take/should have taken, even beyond self interest.
Without venturing too far into the politics, it appears the new govt has hamstrung itself over the promises made on general taxation......but without those promises they may well not have been elected......rock and hard place and all!

Isn't better to close a wide open goal for tax avoidance by the relatively rich then to increase general taxation  After all the change to making pensions liable for IHT merely makes the overall taxation the same as if the deceased had bequeathed money they had drawn down themselves. Why should the two cases be different?

LHW99

Linton said:

MK62 said:

SnowMan said:

I understand those affected are disappointed by this and face a significant new tax bill on death, but leaving aside thoughts on inheritance tax generally, who thinks things could have continued as they were?

True enough, but opinions will vary wildly about what form any changes should take/should have taken, even beyond self interest.
Without venturing too far into the politics, it appears the new govt has hamstrung itself over the promises made on general taxation......but without those promises they may well not have been elected......rock and hard place and all!

Isn't better to close a wide open goal for tax avoidance by the relatively rich then to increase general taxation  After all the change to making pensions liable for IHT merely makes the overall taxation the same as if the deceased had bequeathed money they had drawn down themselves. Why should the two cases be different?

There is an additional NRB for main house being left to direct relatives, which has been left alone.

IMO having a NRB for residual pension left to (direct?) relatives could have been implemented, perhaps set at the current level of TFC.

It would encourage people to at least save more generously into their pension, rather than trying to exactly calculate what they would need - probably wrongly as so many people underestimate their life expectancy.

It would also mean that those who have disabled children, or ones that remain largely dependent as adults would benefit (which even DB pensions don't really do).

MK62

Linton said:

MK62 said:

SnowMan said:

I understand those affected are disappointed by this and face a significant new tax bill on death, but leaving aside thoughts on inheritance tax generally, who thinks things could have continued as they were?

True enough, but opinions will vary wildly about what form any changes should take/should have taken, even beyond self interest.
Without venturing too far into the politics, it appears the new govt has hamstrung itself over the promises made on general taxation......but without those promises they may well not have been elected......rock and hard place and all!

Isn't better to close a wide open goal for tax avoidance by the relatively rich then to increase general taxation  After all the change to making pensions liable for IHT merely makes the overall taxation the same as if the deceased had bequeathed money they had drawn down themselves. Why should the two cases be different?

It wasn't a comment specifically about IHT, as Snowman specifically said "leaving aside thoughts on inheritance tax generally"!

Albermarle

SnowMan said:

And following on my previous post had the inheritance tax position of pensions not changed, I suggest the majority of people with total assets above the inheritance tax threshold in the very long term would intentionally or unintentionally have been avoiding inheritance tax by way of the inheritance tax free nature of pension pots.
After all in the very long term, defined benefit pensions will have completely disappeared outside the public sector, few would have chosen to use all of their pensions to buy an annuity, and few would not have been using pensions to meet their main retirement needs.
I understand those affected are disappointed by this and face a significant new tax bill on death, but leaving aside thoughts on inheritance tax generally, who thinks things could have continued as they were with pension retaining beneficial treatment on death?

As someone who regularly mentioned on the forum pre budget, that targeting of this rather illogical loophole was likely, I was still surprised by the rather brutal way the door was banged shut. By that I mean the full amount of any unused pot being included in the estate for IHT purposes. I was expecting some kind of levy, nil rate band for pensions etc. Although I guess implementation could have been difficult, just like with the current proposals.
I think this would have still largely deterred people deliberately building up large pots just to avoid IHT, but not punished so much those who did it more by accident than design. 

Sarahspangles

Albermarle said:

As someone who regularly mentioned on the forum pre budget, that targeting of this rather illogical loophole was likely, I was still surprised by the rather brutal way the door was banged shut. By that I mean the full amount of any unused pot being included in the estate for IHT purposes. I was expecting some kind of levy, nil rate band for pensions etc. Although I guess implementation could have been difficult, just like with the current proposals.
I think this would have still largely deterred people deliberately building up large pots just to avoid IHT, but not punished so much those who did it more by accident than design. 

Some retirees may have assumed that what remained in their SIPP would be available as a source of spouse’s/partner’s pension. Are there scenarios where the pension will be taxed because a couple were not married, or were married, but not all of the estate has been left to the spouse?

Linton

Sarahspangles said:

Albermarle said:

As someone who regularly mentioned on the forum pre budget, that targeting of this rather illogical loophole was likely, I was still surprised by the rather brutal way the door was banged shut. By that I mean the full amount of any unused pot being included in the estate for IHT purposes. I was expecting some kind of levy, nil rate band for pensions etc. Although I guess implementation could have been difficult, just like with the current proposals.
I think this would have still largely deterred people deliberately building up large pots just to avoid IHT, but not punished so much those who did it more by accident than design. 

Some retirees may have assumed that what remained in their SIPP would be available as a source of spouse’s/partner’s pension. Are there scenarios where the pension will be taxed because a couple were not married, or were married, but not all of the estate has been left to the spouse?

WIth IHT and also income tax individual items arent taxed separately but rather the total is calculated after removal of allowances and tax rate applied to that. Pensions and bequests get included in the total if they are not going to a spouse. The tax is then paid by the estate as a single lump sum. So I am unclear what you are asking.   You cant meaningfully assign specific tax to a specific item.

Sarahspangles

Linton said:

Sarahspangles said:

Albermarle said:

As someone who regularly mentioned on the forum pre budget, that targeting of this rather illogical loophole was likely, I was still surprised by the rather brutal way the door was banged shut. By that I mean the full amount of any unused pot being included in the estate for IHT purposes. I was expecting some kind of levy, nil rate band for pensions etc. Although I guess implementation could have been difficult, just like with the current proposals.
I think this would have still largely deterred people deliberately building up large pots just to avoid IHT, but not punished so much those who did it more by accident than design. 

Some retirees may have assumed that what remained in their SIPP would be available as a source of spouse’s/partner’s pension. Are there scenarios where the pension will be taxed because a couple were not married, or were married, but not all of the estate has been left to the spouse?

WIth IHT and also income tax individual items arent taxed separately but rather the total is calculated after removal of allowances and tax applied to that. So I am unclear what you are asking.  Pensions and bequests get included in the total if they are not going to a spouse.

I’m trying to understand if a spouse can lose out on inherited pension (because part of it is taxed) if just part of the estate is subject to IHT.