ISA vs SIPP - impact of IHT change

Pat38493

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.

Not if they were 40% tax payers and got 40% tax relief on the way into the SIPP.  A SIPP is no longer useful as a tool to bypass inheritance tax, but it was never supposed to be used that way in the first place.  Anyone who was using a SIPP purely for this purpose, will now need to look at whether to pull the money out during the next years.

This is probably not a bad thing as the government will get taxes ealier rather than later.

Albermarle

Pat38493 said:

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.

Not if they were 40% tax payers and got 40% tax relief on the way into the SIPP.  A SIPP is no longer useful as a tool to bypass inheritance tax, but it was never supposed to be used that way in the first place.  Anyone who was using a SIPP purely for this purpose, will now need to look at whether to pull the money out during the next years.

This is probably not a bad thing as the government will get taxes ealier rather than later.

Plus the large majority of estates will still not be subject to IHT, and in most cases for them building up a pension pot with tax relief ( and ideally pension contributions) will normally still be a good idea. 
In fact for many it is the opposite problem- they do not put enough/any in a pension.

Sarahspangles

bjorn_toby_wilde said:

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?

I don’t know if it’s tinkering, I actually think successive governments may not react enough when shifting public behaviour starts to distort the way the economy performs.

I can’t remember what first triggered the growth of buy-to-let but suddenly a lot of people I knew said that ongoing income from BTL was now their pension provision. Others said sale of their BTL portfolio or downsizing from an expensive house would let them retire early. Some kind of early warning that the tax regime might not permanently favour this would have helped people make an informed choice. Similarly, failing to signal that limits would be considered on passing on wealth through inherited pensions would have allowed people to plan a more resilient strategy for their retirement and estates. Where will the money flow next?

Linton

I don’t see why the planned change makes any difference to the justifiable desirability of pensions. It simply means that the total tax on an inherited pension is no different in principle to the total tax that would be due if the deceased had drawn down the money and the proceeds had been inherited.

So the change simply removes a tax avoidance loophole. As a matter of public policy I believe pensions should be used for paying for one’s needs in retirement, not tax avoidance by the wealthy.

SnowMan

Pat38493 said:

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.

Not if they were 40% tax payers and got 40% tax relief on the way into the SIPP.  A SIPP is no longer useful as a tool to bypass inheritance tax, but it was never supposed to be used that way in the first place.  Anyone who was using a SIPP purely for this purpose, will now need to look at whether to pull the money out during the next years.

This is probably not a bad thing as the government will get taxes ealier rather than later.

If the beneficiaries took the money out at 20% income tax (they can wait a bit if they are 40% taxpayers at death) then roughly speaking the break even point over putting the money in an ISA (theoretically assuming ISA allowances were enough to do that) would be if the tax relief averaged about 28% I calculate. See attached. So yes if 40% tax relief then would have done better than the theoretical ISA, I calculate £26,000 better off than with the theoretical ISA. Doesn't look like a worst investment (tax wise) to me. What they will be doing is paying a lot more tax than before the change but that's a different thing altogether.

I think the numbers were deliberately chosen so as to hit up against the tapering away of the nil band private residence relief that works against the pension route, but even then the pension has the potential to 'win'.

   

HUMBUG

poseidon1 said:

As a singleton higher rate tax payer pensioner ( we do exsist), the proposed removal of the pension IHT exemption makes our parlous IHT position much worse.

 We singletons only ever had the long frozen NRB to shelter our estates ( no RNRBs for us), so our Sipps were the only means to pass on a reasonable benefit to nieces/nephews/siblings etc, and dodge the iht bullet for that unused pot.

To that end, my original plan was to continue to build an isa income generating pot, whilst taking modest UFPLSs each year to keep the Sipp reasonably static in value, and make the ISAs increasingly do the heavy lifting in producing tax  free retirement  income going forward.

With the sipp now facing up to 40% iht in future, I am now  thinking why not take the full 25% TFC up front, and steadily feed that into the isa's each year, parking the surplus in low coupon gilts and premium bonds in the interim.

 Makes no difference to my overall iht exposure, but I at least get more tax free income to deploy, rather than put up with permanent  life time 40% ( or higher)  income tax, with a 'nice' 40% IHT goodbye bonus deduction from the Sipp at end of life. 

'First World' problem, I know, but spare a little thought for the beleaguered fiscally penalised singletons out there.

I'm almost in the same situation as you (but a Basic Rate taxpayer now that I am getting a State Pension ). Being single, taking early retirement 9yrs ago and just living off my company pension (9k pa)  and savings/investments.

I added  £2880 into my SIPP every year understanding that any dividends would be tax free and that it wouldn't form part of the estate for IHT. 

Yes, it does seem unfair that single people who own their property (mine is a 1 bedroom maisonnette) do not get the RNRB for £175k .  My property in NW London is probably worth £325k  (ie. the NRB) , therefore 40% of my savings and investments (now including SIPP) will go back to HMRC if I die (as I haven't made a WILL just yet).  When I do get a WILL arranged , I will probably name a few charities to reduce the IHT if possible (not sure what the rules are).

I'll need to investigate more about these low coupon gilts you mentioned as per definition below:
"buying low-coupon gilts at a discount via an investment platform and holding them to maturity. This is more tax efficient, as the gain isn't subject to tax (not even capital gains tax)".

There is maybe the option of opening up trust funds for my great nephews to reduce my IHT, or consider emigrating to another country where there isn't IHT , but I don't know the tax rules on any savings/investments when moving abroad.

Pat38493

SnowMan said:

Pat38493 said:

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.

Not if they were 40% tax payers and got 40% tax relief on the way into the SIPP.  A SIPP is no longer useful as a tool to bypass inheritance tax, but it was never supposed to be used that way in the first place.  Anyone who was using a SIPP purely for this purpose, will now need to look at whether to pull the money out during the next years.

This is probably not a bad thing as the government will get taxes ealier rather than later.

If the beneficiaries took the money out at 20% income tax (they can wait a bit if they are 40% taxpayers at death) then roughly speaking the break even point over putting the money in an ISA (theoretically assuming ISA allowances were enough to do that) would be if the tax relief averaged about 28% I calculate. See attached. So yes if 40% tax relief then would have done better than the theoretical ISA, I calculate £26,000 better off than with the theoretical ISA. Doesn't look like a worst investment (tax wise) to me. What they will be doing is paying a lot more tax than before the change but that's a different thing altogether.

I think the numbers were deliberately chosen so as to hit up against the tapering away of the nil band private residence relief that works against the pension route, but even then the pension has the potential to 'win'.

   

This is a good analysis, but it looks like it assumes that the pension or ISA is entirely given away at death?  

That won't be an assumption for me as my plan is to spend the money for my own retirement as a first priority, and only if things go better than planned would there be anything to give away at death.

In fact, even before the budget this week, my plan was more aligned towards being able to give away some wealth to my heirs whilst I am still alive - my thinking is that by the time I die, at least if I am lucky, it will already be way past the time when they might most need some assistance.  Therefore my plan as it stands, is to extract the money from the pension up to the higher rate tax limit in most of the first 10 years - but this was already my plan even before this week.

I guess if you are in your late 70s and sitting on a very large pension pot, which is a situation that quite a few people could be in depending exactly what year they retired, you might be more concerned about it.  

SnowMan

Pat38493 said:

SnowMan said:

Pat38493 said:

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.

Not if they were 40% tax payers and got 40% tax relief on the way into the SIPP.  A SIPP is no longer useful as a tool to bypass inheritance tax, but it was never supposed to be used that way in the first place.  Anyone who was using a SIPP purely for this purpose, will now need to look at whether to pull the money out during the next years.

This is probably not a bad thing as the government will get taxes ealier rather than later.

If the beneficiaries took the money out at 20% income tax (they can wait a bit if they are 40% taxpayers at death) then roughly speaking the break even point over putting the money in an ISA (theoretically assuming ISA allowances were enough to do that) would be if the tax relief averaged about 28% I calculate. See attached. So yes if 40% tax relief then would have done better than the theoretical ISA, I calculate £26,000 better off than with the theoretical ISA. Doesn't look like a worst investment (tax wise) to me. What they will be doing is paying a lot more tax than before the change but that's a different thing altogether.

I think the numbers were deliberately chosen so as to hit up against the tapering away of the nil band private residence relief that works against the pension route, but even then the pension has the potential to 'win'.

   

This is a good analysis, but it looks like it assumes that the pension or ISA is entirely given away at death?  

That won't be an assumption for me as my plan is to spend the money for my own retirement as a first priority, and only if things go better than planned would there be anything to give away at death.

In fact, even before the budget this week, my plan was more aligned towards being able to give away some wealth to my heirs whilst I am still alive - my thinking is that by the time I die, at least if I am lucky, it will already be way past the time when they might most need some assistance.  Therefore my plan as it stands, is to extract the money from the pension up to the higher rate tax limit in most of the first 10 years - but this was already my plan even before this week.

I guess if you are in your late 70s and sitting on a very large pension pot, which is a situation that quite a few people could be in depending exactly what year they retired, you might be more concerned about it.  

Good for you making your retirement provision your first priority.

The logic is that the inputs are the amounts that are inherited/given away at death.

The person may have/had assets of say 2.5 million outside of an ISA and 900K in the SIPP. 

But the inputs of the 2 million outside of an ISA, and 500K in the pension is just what's left at death, as the person may have spent 0.5 million of the non pension and accessed and spent the 400K in the SIPP to cover their retirement.

The logic is that we accept that the pension works for covering the person's retirement needs, so we exclude those funds that are used to meet retirement expenditure and the contributions and tax relief that created these amounts, and just need to compare what's left that's being used deliberately or incidentally for inheritance to see how it compares with a theoretical ISA.

That's why I labelled it 'inheritance resources in pension' rather than 'value of pension'

Does that make logical sense?

fuzzzzy

Nebulous2 said:

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. 

But they have also talked about the need to get more early retirees back into the workforce as rising early retirement was causing labour shortages. I would think that these IHT pension changes might scupper that aim.

Albermarle

fuzzzzy said:

Nebulous2 said:

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. 

But they have also talked about the need to get more early retirees back into the workforce as rising early retirement was causing labour shortages. I would think that these IHT pension changes might scupper that aim.

Maybe the ones with the big pension pots who are now looking to spend them , can pay less well off people to come out of retirement to do jobs around the house, get the shopping etc. ?