When to stop contributing- IHT changes

Prudent

I am looking for thoughts on contributing to a small private pension with regard to IHT changes.

I have a small private pension worth circa £60,000. I am 59 and no longer working due to ill health. For the past few years I have been topping up that pension with the £2880 permitted if you are not working. I initially started it as a small top up for my occupational pension. I am frugal by nature and feel I could live perfectly well in retirement between my state pension (I have the full number of contributions) and my ill health retirement pension. I have been paying into this pension to reduce my IHT liability. I am wondering if it is still worth it?

Possibly relevant information: 

My health condition may be life limiting, but isn't necessarily so.

I have decent savings currently split between S&S isas, cash ISAs, premium bonds, regular savers and fixed rate bonds. I pay tax on my some of my savings. I am going to put this year's ISA allowance into a cash ISA next week. 

Keep_pedalling

Is your estate anywhere near IHT territory? 

Prudent

Keep_pedalling said:

Is your estate anywhere near IHT territory? 

Yes it is in IHT territory. I have a partner, but we are not married hence my allowance is quite low. I do own my house which gives me £175,000 more, but still won't cover IHT.

DRS1

Frankly the IHT changes aren't a reason to stop contributing to the pension.  

Keep_pedalling

Prudent said:

Keep_pedalling said:

Is your estate anywhere near IHT territory? 

Yes it is in IHT territory. I have a partner, but we are not married hence my allowance is quite low. I do own my house which gives me £175,000 more, but still won't cover IHT.

Who will be inheriting your estate? Assuming it is your children then marrying your partner (or forming a civil partnership) could double your exemptions. If you were planning to give your partner a life interest in your property on your death then you should do that otherwise you risk losing your RNRB. 

Prudent

DRS1 said:

Frankly the IHT changes aren't a reason to stop contributing to the pension.  

Thank you, this is what I am trying to establish. I currently see the restrictions that come with the pension such as having to pay tax on 75% of it, only being able to take so much a year before it pushes me into a higher tax band as possibly outweighing the convenience of ISAs. I have enough pension provision already so the benefit to meet was around IHT.

Marcon

Prudent said:

DRS1 said:

Frankly the IHT changes aren't a reason to stop contributing to the pension.  

Thank you, this is what I am trying to establish. I currently see the restrictions that come with the pension such as having to pay tax on 75% of it, only being able to take so much a year before it pushes me into a higher tax band as possibly outweighing the convenience of ISAs. I have enough pension provision already so the benefit to meet was around IHT.

Putting it bluntly, there's no benefit to you 'around IHT' - you'll be dead before IHT comes into play.

The best aid to IHT avoidance is marriage or a civil partnership, where that's an option.

DRS1

Prudent said:

DRS1 said:

Frankly the IHT changes aren't a reason to stop contributing to the pension.  

Thank you, this is what I am trying to establish. I currently see the restrictions that come with the pension such as having to pay tax on 75% of it, only being able to take so much a year before it pushes me into a higher tax band as possibly outweighing the convenience of ISAs. I have enough pension provision already so the benefit to meet was around IHT.

Certainly if you draw on the taxable bit of the pension you pay income tax on it but you got tax relief on the way in.  If you do stray into higher rate income tax territory then any contribution to the pension in that tax year becomes more valuable because it can save you some of that higher rate tax.

And of course there is the 25% tax free lump sum which you should probably take at some time.

However if the objective is to get the money outside the scope of IHT on your death then you should be looking to spend it or give it away.  But that is something to think about irrespective of the IHT changes for pensions which won't come in until 2027 and who knows what they will look like then.

QrizB

DRS1 said:

.However if the objective is to get the money outside the scope of IHT on your death then you should be looking to spend it or give it away.

This.
Most people who are young enough to get tax relief on pension contributions (ie. under 75) are also young enough that they'll live for another seven years and gifts won't incur IHT.

fuzzzzy

DRS1 said:

Prudent said:

DRS1 said:

Frankly the IHT changes aren't a reason to stop contributing to the pension.  

Thank you, this is what I am trying to establish. I currently see the restrictions that come with the pension such as having to pay tax on 75% of it, only being able to take so much a year before it pushes me into a higher tax band as possibly outweighing the convenience of ISAs. I have enough pension provision already so the benefit to meet was around IHT.

Certainly if you draw on the taxable bit of the pension you pay income tax on it but you got tax relief on the way in.  If you do stray into higher rate income tax territory then any contribution to the pension in that tax year becomes more valuable because it can save you some of that higher rate tax.

And of course there is the 25% tax free lump sum which you should probably take at some time.

However if the objective is to get the money outside the scope of IHT on your death then you should be looking to spend it or give it away.  But that is something to think about irrespective of the IHT changes for pensions which won't come in until 2027 and who knows what they will look like then.

Is the OP not questioning still paying into a pension because they might not be able to get it all out again at the basic tax rate? Therefore they might be getting basic rate relief on the way in but having to pay a higher rate on some of it on the way out?

DRS1

fuzzzzy said:

DRS1 said:

Prudent said:

DRS1 said:

Frankly the IHT changes aren't a reason to stop contributing to the pension.  

Thank you, this is what I am trying to establish. I currently see the restrictions that come with the pension such as having to pay tax on 75% of it, only being able to take so much a year before it pushes me into a higher tax band as possibly outweighing the convenience of ISAs. I have enough pension provision already so the benefit to meet was around IHT.

Certainly if you draw on the taxable bit of the pension you pay income tax on it but you got tax relief on the way in.  If you do stray into higher rate income tax territory then any contribution to the pension in that tax year becomes more valuable because it can save you some of that higher rate tax.

And of course there is the 25% tax free lump sum which you should probably take at some time.

However if the objective is to get the money outside the scope of IHT on your death then you should be looking to spend it or give it away.  But that is something to think about irrespective of the IHT changes for pensions which won't come in until 2027 and who knows what they will look like then.

Is the OP not questioning still paying into a pension because they might not be able to get it all out again at the basic tax rate? Therefore they might be getting basic rate relief on the way in but having to pay a higher rate on some of it on the way out?

That is an element although since they were also planning to use the pension as a device to avoid IHT they probably weren't looking to take much out of it anyway.

But depending on how far over the higher rate threshold the OP goes continuing to make pension contributions after they get there could be worthwhile - who knows it may get them back to basic rate.