Gifting from SIPP

fuzzzzy

After 2027 when pension pots are included in IHT calculations is it still the case that if you die before 75 your beneficiary can still draw on the pot free of income tax?

fuzzzzy

Triumph13 said:

ukdw said:

harlequin55 said:

My understanding is that on second death and after the age of 75 IHT would be levied at 40% and recipients of pension would be taxed on withdrawals at their marginal rate. If it were given away now as gifts out of income then recipients would not pay Tax. If they were then to use it to fund a pension then they would be able to claim tax relief. Yes I am married.

Sounds like a pretty good strategy to me - especially if the recipients are in the 40% tax relief band.

If the recipients are themselves in the 40% band, then you are actually better off withdrawing it yourself at 40% tax, even if you stick in in an ISA rather than gifting it, simply because you get better value from your nil rate band that way.

Side thought - say you had two kids, one a 20% payer and one a 40%, and your will just left a 50:50 split.  I wonder what the position of the executor would be in terms of preferentially routing pension assets to the 20% payer vs unwrapped assets to the 40% one?  I would hope my kids would sort it out via deed of variation, but some people might find it worth including something in their will - in particular setting out how any difference in the pension split should be valued ie do you use the tax rate of the higher payer, so they still get their 50% and the lower paid gets all the benefit of the tax efficient split, or do you do the sums to split the benefit equally?  One to ponder.

I suppose it is up to each beneficiary how they take the money? The 40% tax payer might decide to keep it for early retirement and take it in a tax efficient manner.

Albermarle

fuzzzzy said:

After 2027 when pension pots are included in IHT calculations is it still the case that if you die before 75 your beneficiary can still draw on the pot free of income tax?

That is still the case, for now.
It is a rather illogical rule, so Would not be surprising to see it 're-examined' at some point.

fuzzzzy

Albermarle said:

fuzzzzy said:

After 2027 when pension pots are included in IHT calculations is it still the case that if you die before 75 your beneficiary can still draw on the pot free of income tax?

That is still the case, for now.
It is a rather illogical rule, so Would not be surprising to see it 're-examined' at some point.

Yes that is what I had thought which is why I was considering not touching my DC pot until I was nearer 75. As you say though things could easily change.

Albermarle

fuzzzzy said:

Albermarle said:

fuzzzzy said:

After 2027 when pension pots are included in IHT calculations is it still the case that if you die before 75 your beneficiary can still draw on the pot free of income tax?

That is still the case, for now.
It is a rather illogical rule, so Would not be surprising to see it 're-examined' at some point.

Yes that is what I had thought which is why I was considering not touching my DC pot until I was nearer 75. As you say though things could easily change.

I think the usual advice ( but may not suit every situation) is to at least get the tax free cash out before 75.

Albermarle

Albermarle said:

harlequin55 said:

My understanding is that on second death and after the age of 75 IHT would be levied at 40% and recipients of pension would be taxed on withdrawals at their marginal rate. If it were given away now as gifts out of income then recipients would not pay Tax. If they were then to use it to fund a pension then they would be able to claim tax relief. Yes I am married.

To be clear, on second death , unused DC pension pots ( including SIPPs) would be added to your other assets to calculate your IHT liability.
Any IHT payable will be apportioned between non pension assets and pensions.
So only a portion of your unused pension pots would be subject to 40% IHT.
If you were only just above the IHT limits, then the tax on the unused pots would be small.
If you were a multi millionaire, the most of the unused pots would get taxed.

I have read an e mail from AJ Bell today about the new legislation coming in 2027.
It said the executor could decide to pay any IHT due directly from the unused pension pot , or from other assets.
So not necessarily in direct proportion, as mentioned in my post above.
So not now sure what the true detail is, maybe still up for modification when the legislation goes through Parliament.

Triumph13

Albermarle said:

say you had two kids, one a 20% payer and one a 40%, and your will just left a 50:50 split.  I wonder what the position of the executor would be in terms of preferentially routing pension assets to the 20% payer vs unwrapped assets to the 40% one?

The pension pots would be paid out to the beneficiaries in line with what it said on the Expression of wishes form. ( unless there were exceptional circumstances) Pensions should not even be mentioned in wills, as they are held in trust.
This will remain the same even after 2027, when they will be included in IHT calculations, but otherwise will legally remain out of the Estate like now. 

Doh!  I got too wrapped up in the maths and forgot that rather important detail!  So any planning would need to be done in advance and reflected in the expression of wishes.  That probably puts it into the 'too hard' pile in a lot of cases.

harlequin55

Thank you to all who have contributed to my initial post.