When to stop contributing- IHT changes

fuzzzzy

DRS1 said:

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.

But they are already retired and only putting in £2880 a year, and with IHT pension changes coming they might be thinking they want to take out for gifting purposes.

I have been having similar thoughts as I am in a similar position. I'm nearly 60, intending to retire this year, and in IHT territory, and single (but with no-one to marry!). I had been overpaying to the maximum into my works DC pension as an IHT avoidance vehicle, and before October had intended opening a SIPP to get even more money out of my estate. I'm still thinking about whether to open a SIPP tomorrow as I have about £10k I could pay in, and then could top up with £2880 for the next 15 years.

My thinking is paying into a SIPP could still be a good option, but I had a little niggle that with a DB pension and a full state pension, and interest from cash savings I could possibly stray into higher tax if I then also wanted to drawdown taxable income from the DC pensions. It is unlikely though as I have already started gifting and intend to spend to reduce my savings, and I guess at some point they will lift the higher tax threshold?

Prudent

Thank you so much everyone you are helping to clarify my thoughts. 

@fuzzzzy that is exactly my position. This pension started off as an extra to top up a small DB pension. However I am finding small is okay because I am frugal by nature. I do intend passing on money to avoid IHT so in this sense an ISA is better as lump sum access isn’t taxed. However I am already using my isa allowance. For complex reasons now is not the right time for the recipient. I don’t want to share those reasons to protect their privacy. 

ali_bear

What about a trust fund? 

Prudent

ali_bear said:

What about a trust fund? 

Thank you, I have explored this, and it is not the best route for us. I would ideally like to buy the recipient a small property as they rent. I need to wait until their circumstances are right. I will also be paying for studying and qualifications when possible. As you rightly picked up on with the trust comment, their circumstances are complicated. It is because of the challenges in their life that I am seeking to pass on as much as possible.

fuzzzzy

Prudent said:

Thank you so much everyone you are helping to clarify my thoughts. 

@fuzzzzy that is exactly my position. This pension started off as an extra to top up a small DB pension. However I am finding small is okay because I am frugal by nature. I do intend passing on money to avoid IHT so in this sense an ISA is better as lump sum access isn’t taxed. However I am already using my isa allowance. For complex reasons now is not the right time for the recipient. I don’t want to share those reasons to protect their privacy. 

My own position is that I think it is still worth carrying on with the original plan I had before the October announcement on pensions and IHT, and leaving my works DC pension and a small SIPP to potentially be inherited after taking out the 25% tax free at some stage. As I will have had basic tax relief on the way in to the pensions, as long as my beneficiary takes it out in a tax efficient manner then I don't see it would have been any better to save that money in an ISA. I will use my ISA allowance each year for my taxable savings. My own work DC pension is only ~ £100k and I will not be contributing much more to it as I intend to retire this year. I will only be able to put around £10k in a SIPP this year (if I get a move on!) and £2880 for the next 15 years. Most of my money is in cash already so I need to spend and gift that to reduce my IHT liability.