ISA vs SIPP - impact of IHT change

Linton

Juno_Moneta said:

No need to mansplain that money can be taken out of an ISA ‘tax free’ - everyone on MSE understands this is just a savings or investment account forp your post tax income that attracts no tax on capital gains or dividends. 

You’re missing my point - which is that building up a large ISA to live off before accessing your SIPP is now of no benefit. 

The tax on the SIPP is now inevitable - either paid by me in my lifetime or my dependents in theirs. 

Hence ditch the ISA and just have a SIPP. 

Does anyone else share this view?

Two advantages of an S&S ISA  as part of your retirement planning..
 - you can access the money before age 57
 - it reduces or avoids higher rate tax in retirement.

So they have a useful purpose for some people.

All bringing pensions under IHT does is to prevent people using SIPPs for avoiding IHT.  The objective of any pension system is to allow and encourage people to support themselves in retirement, not tax avoidance.

MK62

I think we need to wait and see the detail first........bringing pensions into IHT could mean different things, depending on how it's done........for example, will there be a "pension nil rate band" as long as the pension is passed to direct descendants (rather like the residence nil rate band)?

Triumph13

MK62 said:

I think we need to wait and see the detail first........bringing pensions into IHT could mean different things, depending on how it's done........for example, will there be a "pension nil rate band" as long as the pension is passed to direct descendants (rather like the residence nil rate band)?

The intended detail is already in the consultation document.  SIPP amount added to other assets amount.  If the total is bigger than the nil rate band, then the nil rate is split pro rata between the two and communicated to the pension scheme who then pay 40% of the excess to HMRC whilst the executor pays 40% of the excess on the non-pension assets.

As per my previous, not only does this bring pensions into IHT, it effectively reduces the value of the nil rate band by using up some of it on assets that will be subject to further tax when withdrawn.

Sarahspangles

Linton said:

Two advantages of an S&S ISA  as part of your retirement planning..
 - you can access the money before age 57
 - it reduces or avoids higher rate tax in retirement.

So they have a useful purpose for some people.

There would be no point OH leaving me or his son a SIPP because we’d pay higher rate tax if we wanted to access it. In my case because I’ll be at the threshold with my own pensions plus widow’s pension. It’s not capital like an ISA.

IvanOpinion

I go for a balanced approach, both the ISA and the SIPP served a purpose pre-budget and both serve a purpose post budget. My main driver for balanced though is that nobody knows what a future government may do, so maybe moving all your money to one or the other could end up being a bad choice.

MK62

Triumph13 said:

MK62 said:

I think we need to wait and see the detail first........bringing pensions into IHT could mean different things, depending on how it's done........for example, will there be a "pension nil rate band" as long as the pension is passed to direct descendants (rather like the residence nil rate band)?

The intended detail is already in the consultation document.  SIPP amount added to other assets amount.  If the total is bigger than the nil rate band, then the nil rate is split pro rata between the two and communicated to the pension scheme who then pay 40% of the excess to HMRC whilst the executor pays 40% of the excess on the non-pension assets.

As per my previous, not only does this bring pensions into IHT, it effectively reduces the value of the nil rate band by using up some of it on assets that will be subject to further tax when withdrawn.

Assuming the proposed legislation which comes before parliament is exactly as currently set out in the consultation document.......I have no idea if there will be any changes, but I certainly wouldn't rule it out yet.

Sarahspangles

Triumph13 said:

MK62 said:

I think we need to wait and see the detail first........bringing pensions into IHT could mean different things, depending on how it's done........for example, will there be a "pension nil rate band" as long as the pension is passed to direct descendants (rather like the residence nil rate band)?

The intended detail is already in the consultation document.  SIPP amount added to other assets amount.  If the total is bigger than the nil rate band, then the nil rate is split pro rata between the two and communicated to the pension scheme who then pay 40% of the excess to HMRC whilst the executor pays 40% of the excess on the non-pension assets.

As per my previous, not only does this bring pensions into IHT, it effectively reduces the value of the nil rate band by using up some of it on assets that will be subject to further tax when withdrawn.

I was thinking about this, but came to the conclusion cash in a SIPP is still cash. It’s the beneficiary’s circumstances that determine whether they will be taxed if they use it for income, just as inheriting a house or a classic car could incur CGT, or inheriting savings could incur tax if you have exhausted your personal savings allowance. And you pay IHT on those other assets.

So having previously decided it wasn’t ‘capital’ (cash) I think it is, for the purposes of determining the size of someone’s estate, but it’s not capital for the beneficiary unless and until they convert it to capital outside the SIPP wrapper.  Unless you’re confident of dying at the precise point that a beneficiary could themselves retire and extract money from the SIPP in a tax efficient way, by using their personal allowance, you’re risking its value being depleted by their tax position.

Albermarle

Emmia said:

Juno_Moneta said:

Frankly I can’t be bothered. It seems obvious to me that building up a large ISA to delay accessing my SIPP is now a waste of time, but each to their own I guess. 

Fundamentally it depends when you want/expect to access the money you're putting away. 

Surely the goal should be building "savings" through both a pension, for the later years, and ISAs or other savings to deal with life's buffeting winds, that can be accessed earlier?

Piling everything into a pension ties up money someone might want/need earlier, for whatever non retirement reason, or to enable them to retire before the pension can be accessed.

Having a huge pension pot left when you've lived to a ripe old age, surely indicates those savings were not really for retirement, but at least partly as an IHT dodging ruse?

I do understand people want to minimise tax, but focusing on only one element of the ISA/Pension mix is also surely a bit tail wagging the dog?

I think for some people there is an element of unintended consequences. 
Using my self as an example I built up a significant DC pot(s) as I wanted to retire early, and I was anyway a saver rather than a spender, and a 40% tax payer. It was only later that I found out that a pension was also an IHT friendly way to save.
So although I was happy to have this loophole, it was not part of some deliberate grand tax dodging strategy, it was just there. I suspect many who could have benefitted from it were actually unaware of it.

On a more general point, in this SIPPs vs ISA debate, it should not be forgotten that both still protect investments from CGT and dividend tax ( and the hassle of documenting them and filling in tax returns).
So for example taking out a big TFLS from a SIPP, will lose these advantages.

SnowMan

Its interesting to look at scenarios where investing in a pension to avoid inheritance tax under the new rules would give a worse outcome than investing in an ISA, all other things being equal. It is possible (I think) to come up with scenarios where the pension route is worse as I did in this post

But generally despite the changes coming in the pension still just about wins in most scenarios because broadly speaking the tax on the pension coming out is less than the tax relief going in (including when allowing for tax free cash) and when combining that with inheritance tax the overall tax net of tax relief is slightly less.

So for the average person who is more concerned with maximising retirement income and minimising tax in providing that retirement income then I don't think the changes should discourage most people from using a pension or a mix of pension and ISA.

In terms of the question which order to take them in: The important things tax wise (and other wise) that come to mind are

1. Make sure you utilise your personal allowance every year, in particular in the early years where other income is below the personal allowance. So don't just take money out of an ISA (or just the tax free cash from the SIPP) to live on when you could be using the SIPP to produce taxable income up to the personal allowance.

2. If you can avoid ever paying higher rate tax then take income from the SIPP so as to avoid that higher tax

3. If you can't avoid ever paying higher rate tax then make sure you fully utilise your basic rate band in other years so as to minimise your overall higher rate tax in the years where you do pay higher rate tax

4. have enough in an ISA to cover the years before you are allowed to access your SIPP.  

Triumph13

Alternate plan.  Make sure you have enough in ISAs to cover your final illness.  When you get a terminal diagnosis, withdraw all the excess over the nil rate band from your SIPP in one go and gift it - it's clearly a gift from income unless they specifically legislate to stop this.  You pay 45% tax rather than 52% or 64%, which should be enough of a difference to be worth the hassle of your heirs receiving it unwrapped.

That way you keep hold of the investments until you know you're not long for the world and avoid the longevity risk of gifting early.