ISA vs SIPP - impact of IHT change

artyboy

Albermarle said:

fuzzzzy said:

Juno_Moneta said:

"up to now I’ve been generally a frugal person but not anymore."

"What that means is that we will now be embarking on a gift spree "

"Interesting, your thoughts are in line with a behavioural change I identified "



I too am planning to accelerate SIPP withdrawals and increase gifts, so count me in.

On one hand a lot of people, myself included, are not happy with the IHT change ... but ... there is no denying that it is economy positive as the noted behavioural changes multiplied across thousands of pensioners will inject huge sums into goods and services (assuming mainly UK based) - when perhaps without the 'spending incentive' it would have just sat on a dusty Hargreaves Lansdown (or similar) ledger...!

So "Pensioners Spending Spree" should really be the newspaper headlines - but sadly the mainstream press prefer focusing on the little things in the budget - and have missed the elephant hiding in plain sight.

After initially reeling at the pension IHT change on Wednesday I am finding myself today having little glimmers of excitement at the thought of spending money. I even found myself today in Waitrose rather than Tescos. Maybe this change will be a good thing for those of us who are too frugal to learn to live a little.

I feel a bit the same.
Although I was in Waitrose today and this one had a sushi counter.
It all looked very nice and fresh and I thought it would make a nice change for lunch.
£8.50 for a bit of fish and rice. Daylight robbery.
Old habits die hard……

I'm not overly impressed with the Sushi Daily offering that you get in Waitrose. Although they do sometimes sell their offcuts in a bowl called 'forgotten ends' that is quite MSE priced...

But I do like the thinking that everything I buy in retirement is in a small way sticking it to the man...

minimumcost

Just joining this intersting thread. Apart from the personal consequences expressed here does anyone have a considered view on the unintended consequesnces to the nation... and therefore to the individual? Until now SIPP and ISA wrappers have been very close to equal in terms of returns. Near or over a specific total wealth threshhold SIPP now presents a significantly poorer return. This means a large increase in the number of people, already commited to an existing investment mix, that are motivated make decisions to protect their assets from this tax raid.

There's a large imbalance in where the tax burden is carried with wealthier folks carrying much more of the burden. These are people who have choice. It's already reported that moderately wealthy people are are spending on large assets to offset the 40% loss.... and these assets will be predominantly imports and overseas purchases. This is on top of their investments through funds having less that 6% invested in the UK with little prospect of that increasing.

For example, for an ageing retired coulple that planned to pass on an inheritance with, say, £1m in ISA's, £500k in a SIPP and a £1m house, the SIPP's now looks like worst investment they could ever have made. There are a lot of people in that bracket that now have to make a decision which is bound to take money out of the UK economy one way or another.... and they won't be spending it on second homes.

JayRitchie

minimumcost said:

Just joining this intersting thread. Apart from the personal consequences expressed here does anyone have a considered view on the unintended consequesnces to the nation... and therefore to the individual? Until now SIPP and ISA wrappers have been very close to equal in terms of returns. Near or over a specific total wealth threshhold SIPP now presents a significantly poorer return. This means a large increase in the number of people, already commited to an existing investment mix, that are motivated make decisions to protect their assets from this tax raid.

There's a large imbalance in where the tax burden is carried with wealthier folks carrying much more of the burden. These are people who have choice. It's already reported that moderately wealthy people are are spending on large assets to offset the 40% loss.... and these assets will be predominantly imports and overseas purchases. This is on top of their investments through funds having less that 6% invested in the UK with little prospect of that increasing.

For example, for an ageing retired coulple that planned to pass on an inheritance with, say, £1m in ISA's, £500k in a SIPP and a £1m house, the SIPP's now looks like worst investment they could ever have made. There are a lot of people in that bracket that now have to make a decision which is bound to take money out of the UK economy one way or another.... and they won't be spending it on second homes.

I've been trying to run the numbers for SIPP vs ISA to see which might work better for IHT and seeing lots of advice to go for ISAs but am not convinced I understand the full calculation.

Does the beneficiary have to treat the whole of their inheritance as income in one year or can they spread it/ hold it for low tax years or retirement? Does it count as income for student loan deductions?

af1963

... an inheritance with, say, £1m in ISA's, £500k in a SIPP and a £1m house, the SIPP's now looks like worst investment they could ever have made. 

If it had been invested identically outside the SIPP, the £500k would have likely been only £300k.  ( Anyone reaching these levels of savings would have probably benefitted from 40% tax relief, or more, on their pension contributions.)

Or maybe worth even less:  it might not be possible to get it into ISAs, so there would be tax due on the dividends and interest if it wasn't in the SIPP. So it wouldn't grow as fast.

Any IHT on unused sums at death really just reclaims the tax relief ( and the investment growth on the tax relief).  How the inheritor chooses to take it might lead to some further income tax, if inherited after age 75.

JayRitchie

af1963 said:

... an inheritance with, say, £1m in ISA's, £500k in a SIPP and a £1m house, the SIPP's now looks like worst investment they could ever have made. 

If it had been invested identically outside the SIPP, the £500k would have likely been only £300k.  ( Anyone reaching these levels of savings would have probably benefitted from 40% tax relief, or more, on their contributions.)

Any IHT on unused sums at death really just reclaims the tax relief ( and the investment growth on the tax relief).

That is what my back of fag packet maths was suggesting but I'm not clear on what the tax point for the beneficiary is and whether they have any flexibility about this. 

minimumcost

JayRitchie said:

af1963 said:

... an inheritance with, say, £1m in ISA's, £500k in a SIPP and a £1m house, the SIPP's now looks like worst investment they could ever have made. 

If it had been invested identically outside the SIPP, the £500k would have likely been only £300k.  ( Anyone reaching these levels of savings would have probably benefitted from 40% tax relief, or more, on their contributions.)

Any IHT on unused sums at death really just reclaims the tax relief ( and the investment growth on the tax relief).

That is what my back of fag packet maths was suggesting but I'm not clear on what the tax point for the beneficiary is and whether they have any flexibility about this. 

One way or another SIPPs just became signifcantly less attractive vs ISAs or even straight CGT investment.

If an earner is investing with the expectation that they might pass on anything more than £2m in assets, on the balance of probability, it makes little sense to invest through a SIPP. It might make a difference if it involves an employers contribution.  A SIPP can't be gifted before death and it can't be drawn on before retirement. There's a limited time frame in which you can manage the tax implications. There's a fair chance the inheriter is going to lose 40% of the principle and a least 20% of what's left.

If the individual is already retired the situation is dire and gets worse the older the person is now. A person at 65 has 20 years to live, planned to drawn on an ISA and pass on the SIPP outside IHT, they now have to switch to drawing down from the SIPP on top of the state pension. Do the numbers. It is a HUGH HIT. For every pound they pass on at least 52p goes on tax. If the SIPP starts at £500k, is invested in a global traker, is drawn on at the most efficient tax rate one would struggle to get the liability down to £300k.

So while af1963's numbers might be right, in these scenarios individuals would have made different decisions if only on timing and allocation.

Nebulous2

It may well be that getting people spending is an intended consequence of the IHT change, rather than an unintended one. 

I've certainly seen articles raising concerns that baby boomers moving into retirement are not spending as much money as expected and are sitting on their accumulated wealth to the detriment of the economy. 

With a sample size of one, that has been the case for us- at a point where we are still young and relatively healthy. We have spent less so far than we intended to. Caring responsibilities, scaling back our ambitions for our house and contentment with what we have have all contributed to that. 

noclaf

For now I am not changing anything, early 40's and my only rule is contributing enough to the pension to receive max employer 'match' and stay below £100k taxable income during the good years. I am also building up my S&SISA as having accessible funds is important to me knowing that in the current climate the rug can be pulled away very quickly re. job security and earnings potential.

Once the overall pension(s) values hit a certain level may need to revisit but not there yet. My focus last few years was to remediate the pensions situation as was very low till I hit mid/late 30's but in some respect am glad I didn't go too aggressive as it's clear the government can and will change the goalposts.

SnowMan

AshleyH576 said:

I haven’t seen anything written yet about the interaction of making unused pension pots subject to IHT and the taper of Residential Nil Rate tax allowance.  As I understand it…(I hope Martin L can pick this up!)
The calculation of the taper starts at the point that your ‘estate for taper purposes’ (my words) reaches either
£1m for a single parent leaving property to a descendent, or
£2m for a surviving spouse who dies, having inherited a transferred residential nil rate band from deceased spouse.
(both assuming no lifetime gifts reduce the IHT allowance(s) ).

[if you bought a house/flat 30+ years ago in London, the house/flat + an unused pension pot could well exceed these figures, especially on an early death.] 

The value of the ‘estate for taper purposes’ is like the IHT estate value but doesn’t include eg gifts made in last 7 years.
the point is when this value exceeds £2m for a surviving spouse, the total RNRB get tapered away at £1 for every £2 of estate taper value.  In effect , now , for a surviving spouse who dies, the estate is being taxed at 60% marginal rate in the range of £2m-£2.7m.
so it appears that (according to the gov consultation paper), the pension scheme administrators could take off, if there is no IHT allowance left after everything else, say £60k IHT from a £100k pension pot, leaving £40k . What’s left is then available for the beneficiaries, who still have to pay income tax on what they drawdown at their marginal rate (0/20/40%).

so die at age 76, your child is now say 46 , maybe at near-peak earnings at £50k, and anything they touch now gets hit by 40% or more. Even spread over several years , that means in the above example , £16k of £40k left goes in income tax. Wow. Not much left. 

I hope these calcs are wrong… but I suspect the actual tax position could be worse.

NB as noted above though re gifts in last 7 years, if you can gift it away early, at least you could reduce this additional tax due to the taper.  

Does the tapering away not start at 2 million for a single person with direct descendants also? I've just tried to check and can't find anything to say it's 1 million for a single person.

If for the sake of illustration we make the assumption that pensions should be part of the estate for IHT to ensure tax neutrality (that's a separate discussion), I would agree there is a potential unfairness in the scenario that if the estate is at the 2 million mark, and somebody then invests in a pension, the tax relief and return on that tax relief increases the value of the 'estate' (by which I mean estate plus pension value) to above 2 million bringing in the tapering of the residence nil rate band that wouldn't otherwise apply if invested in other assets. 

The same sort of thing can happen if the estate is right on the overall nil rate band. Again the tax relief pushes the 'estate' above the inheritance tax threshold and inheritance tax is paid when it wouldn't otherwise but for the tax relief. And in terms of overall tax the combined inheritance tax, income tax less tax relief on the way in, could mean the person and their beneficiaries could be slightly worse off than had they not invested in a pension.

If they've done well in getting pension moneys out at a lower rate of tax than the tax relief going in that might cancel it, but that's not always going to be the case.

Here's an owner occupier example (pension vs ISA) based on second death, with the spouse inheriting all on first death where it all balances out in the end, but that's not always the case. Note the lower nil rate band for the pension vs the ISA route.

bjorn_toby_wilde

noclaf said:

For now I am not changing anything, early 40's and my only rule is contributing enough to the pension to receive max employer 'match' and stay below £100k taxable income during the good years. I am also building up my S&SISA as having accessible funds is important to me knowing that in the current climate the rug can be pulled away very quickly re. job security and earnings potential.

Once the overall pension(s) values hit a certain level may need to revisit but not there yet. My focus last few years was to remediate the pensions situation as was very low till I hit mid/late 30's but in some respect am glad I didn't go too aggressive as it's clear the government can and will change the goalposts.

It’s the constant tinkering from governments of all flavours that is so frustrating.  It makes it so hard to plan for the future.

I wonder, do other countries have such complex pension arrangements and continually change them?