Managing impact of 2025 IHT on Pension pot

cockshootflyer

HI all, I am now of state pension age with a decent sum of money in a private pension. My plan was to leave the private pension invested long term to provide income to me and my wife and then on my death to provide benefits to my spouse and possibly son who are both named beneficiaries. However, the recent changes in IHT have raised serious doubts as to whether that plan remains appropriate. I am now considering crystallising the pension pot taking the lump sum immediately and drawing down whatever the 20% tax threshold allows and placing this in ISAs to use both my and my wifes annual ISA allowance. This level of drawdown will take 12 years but in my mind will drastically reduce the impact of IHT  should the worst occur.
I believe I can leave my ISA to my wife which will not attract IHT (currently).
My IFA disagrees and suggests that business as normal ie leave it invested take an income as funds permit/are required.
Anyone else in a similar position and have any advice or alternative measures?
I should add that the pension is held in a SSAS so there are other investment options available but will not avoid the IHT issue.
Thoughts would be very welcome 
  
  

dunstonh

I am now considering crystallising the pension pot taking the lump sum immediately and drawing down whatever the 20% tax threshold allows and placing this in ISAs to use both my and my wifes annual ISA allowance. 

If you are at state pension age now as you say, then you have plenty of time.  The aim is to get the 25% out by ag 75.  Not 66.

I believe I can leave my ISA to my wife which will not attract IHT (currently).

Nor will the pension attract IHT in that scenario.

My IFA disagrees and suggests that business as normal ie leave it invested take an income as funds permit/are required.

The IFA is largely correct.  Making changes when the full rules are yet to be confirmed is a risk.
Time is also on your side as there is no change in tax position between you and your wife.

And taking money out of the 75% element of the pension to put it into an ISA doesn't avoid IHT.

Anyone else in a similar position and have any advice or alternative measures?

Current thinking is to get the 25% out by age 75 and as there is no difference between the pension and alternative wrappers before 75 in respect of IHT you start to consider your options in the lead up to that.  It also depends on the beneficiary and what they would do.  i.e. would they leave the penson until they retire?  would thy be a basic tax payer?

An annuity with a long guarantee period bought after first death is an option that some are considering pending the final rules.   Whilst capital is subject to IHT, the annuity income is not unless it is commuted for a lump sum (i.e. value protect).    So, an annuity with a 30 year guarantee bought after the first death means the beneficiary gets the inheritance on drip but with no IHT against it.  By waiting for second death, you delay the point until a later age (albeit the very small risk of death at the same time).  If that is a concern, then buy the annuity at 75.

doodling

Hi,

It would be helpful if the OP could explain how their plan would make any difference to the amount of IHT due.  On the face of it, the plan as described would have no effect.

I suspect that the OP has misunderstood the proposed change.

af1963

doodling said:

Hi,

It would be helpful if the OP could explain how their plan would make any difference to the amount of IHT due.  On the face of it, the plan as described would have no effect.

I suspect that the OP has misunderstood the proposed change.

In the short term at least, taking the lump sum * increases* the assets potentially affected by IHT.  While in the pension, they are currently ( until 2027 ) excluded.

Albermarle

doodling said:

Hi,

It would be helpful if the OP could explain how their plan would make any difference to the amount of IHT due.  On the face of it, the plan as described would have no effect.

I suspect that the OP has misunderstood the proposed change.

Also my immediate thought .

cockshootflyer

Thanks both for the response, these are the assumptions I have made:
The estate exceeds the £325K IHT allowance, any and all funds above this level attracts IHT of 40% except for:.
Funds held in my ISA which can be transferred to my wife without attracting IHT.
My interest in our property  can be transferred  to my wife and not attract IHT.
Those funds that I Gift from drawdown and deposit in my wifes ISA would not attract IHT.
So in essence I am transferring my pension pot to our ISAs and paying 20% tax to do so.

Our income would be drawn from our savings and my ISAs should the need arise.

It has occurred to me that I'm dealing with something that occurs on my death, my original aim was a pension legacy which the proposed change in regulation appears to be targeting. The new objective is to determine a new strategy to achieve a similar outcome and leave my wife a reasonable source of income. Her pension entitlement is solely a full state pension in 3yrs time. The property has always been seen as a last resort measure and something we want to leave to our son. 

TheTelltaleChart

Under the proposed changes, a pension passed to your wife on your death would continue to be exempt from IHT.

phlebas192

cockshootflyer said:

Thanks both for the response, these are the assumptions I have made:
The estate exceeds the £325K IHT allowance, any and all funds above this level attracts IHT of 40% except for:.
Funds held in my ISA which can be transferred to my wife without attracting IHT.
My interest in our property  can be transferred  to my wife and not attract IHT.
Those funds that I Gift from drawdown and deposit in my wifes ISA would not attract IHT.
So in essence I am transferring my pension pot to our ISAs and paying 20% tax to do so.

Our income would be drawn from our savings and my ISAs should the need arise.

It has occurred to me that I'm dealing with something that occurs on my death, my original aim was a pension legacy which the proposed change in regulation appears to be targeting. The new objective is to determine a new strategy to achieve a similar outcome and leave my wife a reasonable source of income. Her pension entitlement is solely a full state pension in 3yrs time. The property has always been seen as a last resort measure and something we want to leave to our son. 

Anything you pass to your wife will be free of IHT which includes a SIPP. The proposed changes to including SIPPs in your estate for IHT purposes removes the preferential IHT treatment that SIPPs currently enjoy when passing them to someone other than a spouse. 

dunstonh

The estate exceeds the £325K IHT allowance, any and all funds above this level attracts IHT of 40% except for:.
Funds held in my ISA which can be transferred to my wife without attracting IHT.

With your wife the beneficiary of the pension, she would inherit the pension without IHT.

So in essence I am transferring my pension pot to our ISAs and paying 20% tax to do so.

Why?

It has occurred to me that I'm dealing with something that occurs on my death, my original aim was a pension legacy which the proposed change in regulation appears to be targeting. The new objective is to determine a new strategy to achieve a similar outcome and leave my wife a reasonable source of income. Her pension entitlement is solely a full state pension in 3yrs time. The property has always been seen as a last resort measure and something we want to leave to our son. 

So, an annuity would look attractive to your wife on your death and maybe a long guarantee period (circa 30 years) to provide a legacy without IHT.

Aretnap

cockshootflyer said:

Thanks both for the response, these are the assumptions I have made:
The estate exceeds the £325K IHT allowance, any and all funds above this level attracts IHT of 40% except for:.
Funds held in my ISA which can be transferred to my wife without attracting IHT.
My interest in our property  can be transferred  to my wife and not attract IHT.
Those funds that I Gift from drawdown and deposit in my wifes ISA would not attract IHT.
So in essence I am transferring my pension pot to our ISAs and paying 20% tax to do so.

Our income would be drawn from our savings and my ISAs should the need arise.

It has occurred to me that I'm dealing with something that occurs on my death, my original aim was a pension legacy which the proposed change in regulation appears to be targeting. The new objective is to determine a new strategy to achieve a similar outcome and leave my wife a reasonable source of income. Her pension entitlement is solely a full state pension in 3yrs time. The property has always been seen as a last resort measure and something we want to leave to our son. 

Bequests to your wife are not subject to inheritance tax. ISAs, property, pensions, cash, jewellery, artwork, lumps of gold, it makes no difference - none of it will be subject to IHT if/when it passes to your wife. The changes to IHT around pensions should not affect your planning for your wife in any way.

Assuming you leave most/all of your wealth to your wife and when she passes whatever's left gets left to your son, then you can combine your £325,000 bands, and add another £300,000 for your main home, meaning that your son can inherit a cool million (as a mixture of property, pensions, ISAs, cash etc) before he has to start worrying about inheritance tax.

If your estate is likely to be very large then there's certainly an argument for gifting him some money now while you're still relatively young and healthy (and in a position to enjoy watching him benefit from it) to reduce the eventual tax bill. OTOH there's also a good argument for prioritizing your and your wife's comfort and financial security now over saving some tax that your estate might or might not have to pay in many years... after all if your son does eventually inherit over a million pounds he'll be doing alright in the whole, even if he does have to pay a bit of tax on it.

Aretnap

cockshootflyer said:

Funds held in my ISA which can be transferred to my wife without attracting IHT.

Something else that you seen to have misunderstood is the inheritance tax situation around ISAs. They have no special status as far as IHT is concerned. Money held in an ISA is subject to the same rate of inheritance tax as money held in an ordinary bank account or investment account - zero if left to a spouse, 40% above the nil rate band if left to anybody else. 

You might be getting confused about the fact that it's possible for money within an ISA to maintain its ISA status if left to a spouse. So if you had £100,000 in an ISA which you left to your wife, she could transfer it to an ISA in her own name despite it being more than her £20000 annual limit, and avoid the interest on it becoming taxable. However that's separate from the inheritance tax (or lack of it) that would be due on the bequest to her.