ISA vs SIPP - impact of IHT change

Linton

fuzzzzy said:

Nebulous2 said:7

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.

I doubt any more than a small% of the population are worried about IHT on £n00K  of pension money left over when they and their spouses die. Far more will be concerned about whether they have enough to last their lifetime. Their estates probably would not be liable for IHT anyway.

Sarahspangles

fuzzzzy said:

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.

The study was in 2022 under the previous, previous administration. The only outcome I have seen is https://jobhelp.campaign.gov.uk/midlifemot/home-page/ from ‘23, which encourages people to consider something short of full retirement by encouraging them to look at their health and expected retirement income before jumping. Basically, “Don’t become a burden on the benefits bill or the NHS”. The original study was published and one of the findings was that it was unlikely older people who were affluent would change their mind.

Qyburn

Linton said:

I doubt any more than a small% of the population are worried about IHT on £n00K  of pension money left over when they and their spouses die. Far more will be concerned about whether they have enough to last their lifetime. Their estates probably would not be liable for IHT anyway.

The consultation gives some expected figures, and others can be derived or estimated.

"The government estimates that, out of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates – or around 1.5% of total UK deaths - will become liable to pay Inheritance Tax where this would not previously have been the case. Around 38,500 estates will pay more Inheritance Tax than would previously have been the case."

Crunching those figures suggests only around a third of people will be leaving a pension pot at all. And if I follow correctly they're saying that around 7% will be leaving enough to incur IHT on their pension.

SnowMan

Qyburn said:

Linton said:

I doubt any more than a small% of the population are worried about IHT on £n00K  of pension money left over when they and their spouses die. Far more will be concerned about whether they have enough to last their lifetime. Their estates probably would not be liable for IHT anyway.

The consultation gives some expected figures, and others can be derived or estimated.

"The government estimates that, out of around 213,000 estates with inheritable pension wealth in 2027 to 2028, 10,500 estates – or around 1.5% of total UK deaths - will become liable to pay Inheritance Tax where this would not previously have been the case. Around 38,500 estates will pay more Inheritance Tax than would previously have been the case."

Crunching those figures suggests only around a third of people will be leaving a pension pot at all. And if I follow correctly they're saying that around 7% will be leaving enough to incur IHT on their pension.

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 most 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. That's why under a third will be leaving no pension at all and why only 1.5% of all deaths will become liable for inheritance tax.

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 the pension freedoms have been utilised and where the pot has not been exhausted.

If they don't give figures for later years too, then they are making it look like there will be fewer people affected by this measure than there actually will be in the long term through that statistic.

fuzzzzy

Linton said:

fuzzzzy said:

Nebulous2 said:7

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.

I doubt any more than a small% of the population are worried about IHT on £n00K  of pension money left over when they and their spouses die. Far more will be concerned about whether they have enough to last their lifetime. Their estates probably would not be liable for IHT anyway.

Maybe you're right. For me personally I was thinking of retiring next year anyway but definitely will be now. My DC pot is not that large as it only started a few years back when my DB scheme was closed. I quite enjoy my job and there was more reason to continue when I thought I was contributing to an increasing pension pot that I thought I could pass on free of IHT. I do however recognise that it was a loophole that somehow needed plugging.

SnowMan

JayRitchie said:

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?

The beneficiary can take the pension income out as and when they want a bit at a time and in the death over age 75 scenario each bit of income taken out in each tax year is added to the beneficiaries income in that tax year and taxed accordingly. If the beneficiary is a higher rate taxpayer, they can wait until they are not a higher rate taxpayer to take any money out. If they would need to wait until after giving up work to avoid higher rate tax, they might instead want to take some out and then contribute back the same amount back in their own pension in the same working tax year in order to get some more tax free cash but that's probably overcomplicating.  

Pension income doesn't count as income for student loan deductions.

SIPP will do slightly better than ISA in almost all scenarios in terms of maximising funds that end up being inherited but it's now much more balanced. Other factors than the tax on death will be the main drivers.  But the big loophole for SIPPs to be used as an inheritance tax vehicle has gone.

GunJack

Been following this and other IHT on pensions threads and I still find it hard to believe that so many people are so concerned that iht will now become payable on pensions which were built up with tax relief and in a lot of cases lower income tax than would have been payable.

Pensions should be first and foremost to pay for your retirement, and the fact that the state will start to claw some tax back from pensions that have been built up but not used for that purpose seems perfectly fair, especially when it's being claimed from the dead person's wealth who benefitted from al that reduced tax and relief, not from the beneficiaries themselves.

And let's not forget, the IHT is only going to be payable on amounts over the allowances, NOT on the whole estate as some posters seem to infer. Let's face it, inheriting 1.1 million instead of 1.2 million isn't exactly a hardship!! 

If we want to live in a civilised society we need to pay taxes to sustain that....

And just for transparency, I've got 2 dB pensions (so no inheriting bar the spouse 50%), and house prices where I am (and for the majority of the country) won't come into it either....

JayRitchie

SnowMan said:

JayRitchie said:

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?

The beneficiary can take the pension income out as and when they want a bit at a time and in the death over age 75 scenario each bit of income taken out in each tax year is added to the beneficiaries income in that tax year and taxed accordingly. If the beneficiary is a higher rate taxpayer, they can wait until they are not a higher rate taxpayer to take any money out. If they would need to wait until after giving up work to avoid higher rate tax, they might instead want to take some out and then contribute back the same amount back in their own pension in the same working tax year in order to get some more tax free cash but that's probably overcomplicating.  

Pension income doesn't count as income for student loan deductions.

SIPP will do slightly better than ISA in almost all scenarios in terms of maximising funds that end up being inherited but it's now much more balanced. Other factors than the tax on death will be the main drivers.  But the big loophole for SIPPs to be used as an inheritance tax vehicle has gone.

That's really helpful Many thanks. Really interesting about pensions income not being liable for student loan repayments. I had been of the opposite impression. That could make a big difference for someone.

If someone is left money as a beneficiary and is married is there a way they can transfer some of this for their spouse to draw as income?

SnowMan

JayRitchie said:

SnowMan said:

JayRitchie said:

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?

The beneficiary can take the pension income out as and when they want a bit at a time and in the death over age 75 scenario each bit of income taken out in each tax year is added to the beneficiaries income in that tax year and taxed accordingly. If the beneficiary is a higher rate taxpayer, they can wait until they are not a higher rate taxpayer to take any money out. If they would need to wait until after giving up work to avoid higher rate tax, they might instead want to take some out and then contribute back the same amount back in their own pension in the same working tax year in order to get some more tax free cash but that's probably overcomplicating.  

Pension income doesn't count as income for student loan deductions.

SIPP will do slightly better than ISA in almost all scenarios in terms of maximising funds that end up being inherited but it's now much more balanced. Other factors than the tax on death will be the main drivers.  But the big loophole for SIPPs to be used as an inheritance tax vehicle has gone.

That's really helpful Many thanks. Really interesting about pensions income not being liable for student loan repayments. I had been of the opposite impression. That could make a big difference for someone.

If someone is left money as a beneficiary and is married is there a way they can transfer some of this for their spouse to draw as income?

From what More Complicated Than That says it looks like I got it wrong on the student loan deductions.

https://www.whatdotheyknow.com/request/pension_income_included_in_incom

and see this thread

https://forums.moneysavingexpert.com/discussion/6343330/student-loan-repayment-pension-income/p1

Pensions are individual arrangements so you can't transfer the inherited pension to a spouse. If the beneficiary has nominated their spouse then on the beneficiary's death then the pension pot could be inherited by the spouse, but I think you are talking about a lifetime transfer.

Albermarle

GunJack said:

Been following this and other IHT on pensions threads and I still find it hard to believe that so many people are so concerned that iht will now become payable on pensions which were built up with tax relief and in a lot of cases lower income tax than would have been payable.

Pensions should be first and foremost to pay for your retirement, and the fact that the state will start to claw some tax back from pensions that have been built up but not used for that purpose seems perfectly fair, especially when it's being claimed from the dead person's wealth who benefitted from al that reduced tax and relief, not from the beneficiaries themselves.

And let's not forget, the IHT is only going to be payable on amounts over the allowances, NOT on the whole estate as some posters seem to infer. Let's face it, inheriting 1.1 million instead of 1.2 million isn't exactly a hardship!! 

If we want to live in a civilised society we need to pay taxes to sustain that....

And just for transparency, I've got 2 dB pensions (so no inheriting bar the spouse 50%), and house prices where I am (and for the majority of the country) won't come into it either....

I do not disagree with your general comments about tax relief etc. However it is just human nature that if you ( or your heirs) are suddenly effectively handed a bill for £X100K, then it would be surprising if some people were not a bit shocked/miffed, even if they had a feeling that it would happen one day. 

I think considering the amounts of money involved in some cases, the general tone of the comments in various threads on the issue have been quite moderate/grudgingly accepting. Even a few jokes !