ISA vs SIPP - impact of IHT change

ader42

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.

Some people have never been higher rate tax payers so never got higher rate tax relief. They only ever paid contributions that meant their only non-state pension, a SIPP pot would have been only an average size of say £70k. But their investment choices rewarded them very well and up until this budget were going to be able to better their childrens lives significantly due to their investment successes - but now this greedy government is going to “steal” 40% of the investment profit in one lump.

So the tax relief was 20% but IHT is 40%.

Many will see it as far more sensible to just not bother with pensions and let the state look after old-age. Even in the 80s I knew people who refused to put money in their pensions in case they died before retirement age - all the work to encourage people to save for their old-age (beyond the trivial auto-enrolment level amounts) has just been undone in my opinion. 

On a personal level I will now restrict the amount I pay into my kids SIPPs; I’m sure there will be a massive reduction in pension contributions across the nation. Maybe that was part of the intended. 

artyboy

Albermarle said:

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 !

Oh, I'm fuming on the inside, believe me... any jokes can be attributed to gallows humour!

JayRitchie

SnowMan said:

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.

Thanks again - I've also checked the student loan situation on accountingweb - its an interesting one.

I'll run some figures on the SIPP vs ISA equation. I'm concerned that people are suggesting that SIPPs are the wrong way to go if the hope is that these are marginal monies and likely to be left as inheritance. I'm not seeing that the figures support this for most 40% tax payers even without using salary sacrifice schemes. 

GunJack

ader42 said:

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.

Some people have never been higher rate tax payers so never got higher rate tax relief. They only ever paid contributions that meant their only non-state pension, a SIPP pot would have been only an average size of say £70k. But their investment choices rewarded them very well and up until this budget were going to be able to better their childrens lives significantly due to their investment successes - but now this greedy government is going to “steal” 40% of the investment profit in one lump.

So the tax relief was 20% but IHT is 40%.

Many will see it as far more sensible to just not bother with pensions and let the state look after old-age. Even in the 80s I knew people who refused to put money in their pensions in case they died before retirement age - all the work to encourage people to save for their old-age (beyond the trivial auto-enrolment level amounts) has just been undone in my opinion. 

On a personal level I will now restrict the amount I pay into my kids SIPPs; I’m sure there will be a massive reduction in pension contributions across the nation. Maybe that was part of the intended. 

I think many of the people you are referring to probably won't be anywhere near having to pay iht.....

I never stated about 40pct relief, but I think most people with pension pots big enough to worry about this probably were getting it.

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..

Qyburn

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.

Hoenir

ader42 said:

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.

But their investment choices rewarded them very well 

A decade or so of cheap / free money boosted asset prices across the board. There's no free lunches in this world. That money has to be repaid.  

Qyburn

ader42 said:

Many will see it as far more sensible to just not bother with pensions and let the state look after old-age. 

That would be cutting of your nose big time, a high earner choosing to spend even more during their working life, specifically to ensure an impoverished retirement, just to make some obscure point. It won't even reduce the tax the government gets as their income will all be taxed. 

af1963

ader42 said:

Some people have never been higher rate tax payers so never got higher rate tax relief. They only ever paid contributions that meant their only non-state pension, a SIPP pot would have been only an average size of say £70k. But their investment choices rewarded them very well and up until this budget were going to be able to better their childrens lives significantly due to their investment successes - but now this greedy government is going to “steal” 40% of the investment profit in one lump.

So the tax relief was 20% but IHT is 40%.

Many will see it as far more sensible to just not bother with pensions and let the state look after old-age. Even in the 80s I knew people who refused to put money in their pensions in case they died before retirement age - all the work to encourage people to save for their old-age (beyond the trivial auto-enrolment level amounts) has just been undone in my opinion. 

On a personal level I will now restrict the amount I pay into my kids SIPPs; I’m sure there will be a massive reduction in pension contributions across the nation. Maybe that was part of the intended. 

I guess some people are sufficiently stubborn to take decisions that will leave them with a poorer retirement with fewer options. It's a choice they're entitled to make, but good luck living on just £11k state pension.

Pensions are - or were - intended as savings for retirement, not as a way to avoid inheritance tax. They get generous tax relief for that purpose. They're effectively deferred income - not taxed when earned, but taxed when paid. (With a small bonus in that 25% of a DC pot can be taken tax free, which makes it worth doing even for a 20% taxpayer.)

Closing the "no IHT" loophole effectively puts it back to more like how it was during the governments of those well known Communists, Margaret Thatcher, John Major, and David Cameron, where pension pots had to be used to generate retirement income and there was no IHT advantage because there were tax charges on inherited leftover pension funds and on excess amounts over the Lifetime Allowance.
 

Sea_Shell

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 😉

Tuftywufty

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.

ISAs definitely still have value in certain circumstances & I concur with the thought process above of building an ISA pot and taking UFPLS whilst keeping the SIPP value stable. I'm an early retired 64F with a defined benefit £40kpa pension, a decent sized SIPP, premium bonds & ISAs. I have 3 more years to take money from my SIPP before my state pension kicks in. Due to the freeze on the personal allowance this will tip me over into paying 40% tax so thereafter I will only take the tax free lump sum from my SIPP. Even though presently I don't need to take more than my 40k pension I have to take it now at 20% and transfer it to ISAs to avoid 40% tax at a later date. Any lump sums I need for big holidays or new car etc I will then take from my ISAs with no tax to pay.