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Retirement / Drawdown / IHT Planning - What would you do and questions to ask IFA?

My situation is maybe an edge case that has / will be deeply impacted by the proposed reforms to bring pensions into the estate for IHT purposes.

I am a single 53 year old man who turns 55 in April 2026. I am the sole parent of 2 teenage boys having lost their mother to cancer 7 years ago. I have a compromised life expectancy given I have a cancerous brain tumour that, whilst currently stable, is expected to become more aggressive over time.

Numbers are as follows, first world problems I appreciate.

House, owned outright, approximate value £710K. I inherited my wife's nil rate band.
DC pots x 5 totalling £1.3M
Inherited drawdown pot from wife's DC pension £150K
S&S ISA - £109K
Cash ISA's - £106K
Cash in banks - £40K

I work part time and, with the non-worked days partially paid at 75% of earnings by income protection, I have an annual income of c£145K.

Son number 1 will be off to Uni next September. The plan is to fund his tuition fees and his rent costs from the inherited drawdown pot (good way to use the wife's funds having already used some of it to clear the mortgage balance. I will do the same for Son 2 from September 2027. I estimate this will cost approximately £120K for 2 x 3 year degree courses.

Pre-budget, my working assumption was that I was in a good position to leave the house and my pensions to my boys without IHT being an issue and in my mind this represented some form of compensation for losing their Mum so early and, quite possibly me too. The posthumous bank of Mum and Dad lives on...

It seems inconceivable now, bar my death prior to April 2027, that IHT will not be a big issue in the future. I think its likely I will fully retire in April 2027.

I am seeing my IFA who I have been with for a number of years now to chat this through in the New Year and things I have jotted down to discuss and plan for are below. Does this look like a complete list  - what have I failed to consider?

1. University funding x 2 - is it an efficient use of the remaining inherited drawdown funds or is it better funded from other assets? I don't see the point in the boys coming out with £60K of debt each at the end although I do plan for them to take the maximum maintenance grants - likely c£15K each over the 3 years.

2. Develop a plan for spending savings and drawdown the pensions for as long a period of time as possible to minimise exposure to income tax at a rate greater than 20%. I think this will mean taking only my personal allowance each year from the pensions + the 25% TFC unless it may be sensible in my circumstances to take the whole TFC amount up front on retirement. This may tie into potential gifting plans to take some of the total amount of assets out of IHT completely?

3. I intend to ask my IFA (and have given him a heads up already) that I want to understand if there are any ways to better structure my assets from a tax minimisation perspective and to consider the extent and methods of employing gifting to my sons as a possible way of achieving this. Open SIPPS for each as well as the ISA's they already have?

4. Otherwise, I think the general plan will be to spend more freely than I have to date and not deny myself or sons treats and experiences that up to now may have felt 'excessive' or not of sufficient value for money to justify the expense. Sadly I am not a petrol head so a super expensive new car is an unlikely option for me! 

5. Lastly, if I consider that IHT will be an inevitability, how should I arrange my affairs to ensure it is as easy as possible for the bill to be paid without too much stress and bother. The current plan is that the boys will continue to live in the house together in the short to medium term. Family members (also executors) will be on hand to offer guidance and support.

So, hopefully what I have written will give a reasonably clear idea of my situation and what I am hoping to get clear in terms of plans for the future. I think it ultimately boils down to what assets should be spent first, what can reasonably be gifted to take out of IHT.

Anything obvious I have missed or insights anyone has would be welcome.

«1

Comments

  • LHW99
    LHW99 Posts: 4,955 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    Sorry life has dealt you a succession of curve-balls.
    Do you have POA's in place (finance / health)? It will make things easier both for you and your sons, if eg you have to go into hospital for extended periods - they would for example, be able to speak to banks / utilities for you to settle any outstanding bills etc.
    I believe you have to be careful with funds gifted less than 2 years before death (they can be brought back into the estate by HMRC?), but not sure if that's only PET's, or gifts from income.
  • LHW99 said:
    Sorry life has dealt you a succession of curve-balls.
    Do you have POA's in place (finance / health)? It will make things easier both for you and your sons, if eg you have to go into hospital for extended periods - they would for example, be able to speak to banks / utilities for you to settle any outstanding bills etc.
    I believe you have to be careful with funds gifted less than 2 years before death (they can be brought back into the estate by HMRC?), but not sure if that's only PET's, or gifts from income.
    Thanks! POA added to my list of questions.
  • incus432
    incus432 Posts: 373 Forumite
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
    edited 15 December 2024 pm31 1:41PM
    I'm sorry to hear all that. Very tough on your children. 
    I would assume with an income of 145k you should be able to make substantial gifts from surplus income which should be exempt from IHT.  As you probably know these are not subject to the 7 year rule for other gifts (LHW99 said 2 years above, not sure if was meaning something else?). 
    The rules AFAIK are you have to keep records of income and expenditure to demonstrate it is surplus income, be from income not capital, be regular/planned, and not affect your standard of living.  I'd ask your IFA for advice on the record keeping too.


    Oh and always travel first class 

  • Brie
    Brie Posts: 13,504 Ambassador
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    fyi - POAs can be done yourself, don't need legal help.  Costs about £89 each I think.  

    When you sign up to anything with an IFA who may be managing ££ on your behalf do give them a copy of the POA so they know who to talk to if you are unavailable for any reason.  

    Depending on how responsible your sons are would you set up joint bank accounts with them?  For one thing should the worst happen to you that money then becomes that son's and meanwhile it may be convenient if they know there is a source of funds for bills, uni, whatever that they can dip into as required but with you keeping a watchful eye.

    Don't forget to ask the IFA for all the fee details, upfront costs, annual costs, what is paid to the IFA and what is paid to the fund manager(s).

    And again - once you know what you want to do would the IFA be able to meet with you and sons (or at least the oldest) to explain things so they know what's happening and why?  It all depends of course on how sensitive and money adept both sons are.  
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  • ukdw
    ukdw Posts: 302 Forumite
    Eighth Anniversary 100 Posts Name Dropper
    Sorry to hear your situation.

    I think avoiding IHT will be tricky without a massive amount of gifting to sons or trusts - but avoiding the £2m level where you start to lose the residence nil rate band (and there generate a marginal 60 or  80% tax rate I think) is likely to be more feasible.

    In additional to other suggestions - would be worth considering annual £2,880 per son SIPP contributions and annual £4k LISA savings for them too if you are not already doing that - as both will be uplifted by 25%

    Hopefully any IHT bill would just come from the pensions if you manage to keep the full £1m allowances and keep the non pension estate below this level.


  • DRS1
    DRS1 Posts: 586 Forumite
    Part of the Furniture 500 Posts Name Dropper Combo Breaker
    Maybe it is worth asking him about this?
    AIM IHT ISAs – an attractive option for IHT-relief seeking investors?

    Obviously AIM shares are riskier than other types of S&S ISA investments.

    Re Q2 if you have an annual income of £145K how are you going to draw from your pensions at anything less than 40%?  When does the income protection policy stop paying?
  • incus432
    incus432 Posts: 373 Forumite
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
    edited 15 December 2024 pm31 7:12PM
    DRS1 said:
    Maybe it is worth asking him about this?
    AIM IHT ISAs – an attractive option for IHT-relief seeking investors?

    Obviously AIM shares are riskier than other types of S&S ISA investments.
    Interesting.  This chart doesnt fill me with confidence - you'd have to be very brave I think


  • Many thanks for the helpful comments so far, I have added a few things to my list to think about and discuss with my IFA. 

    For clarity, I'm not at deaths door imminently as far as I know but am trying to plan for a possibility / probability of popping off when my sons are late teens to early 20s. Bit of luck I'll last longer but doubtful I'll see my mid 60s.
  • I would do some serious thinking about how you want to spend your time in retirement and how much you think you will need...that obviously also involves being realistic about life expectancy. Then I would come up with a gifting plan from excess income and capital that significantly reduces your estate. I'm in a similar position to you, but live in the US so have a far higher IHT threshold, but I am giving money to my family and charities every year to simplify my affairs and make tax less of an issue. I'm not sure a general IFA is the right person for you and you might look into solicitors that specialize in estate planning.
    And so we beat on, boats against the current, borne back ceaselessly into the past.
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