2027 pension reforms - revising strategies for DC drawdown planning

gm0

Bostonerimus1 said:

I can get behind the idea of drinking more English wine (my tea total Methodist grandmother is rolling in her grave) as there are some excellent English sparkling wines, but the Morgan is not for me. Too quirky and conspicuous. I'll stick with a Toyota or a Honda as I find Japanese products to be well designed and engineered and also good value for money.

Old engineer yells at cloud .... waves fist and snarls.  

As an ex engineer - I have a hatred of planned obsolescence and deliberately doing the worse thing - because cost accountants have been at work on the bill of materials. The if it makes it to the end of warranty - who cares approach. Consequently I hate most modern cars currently available.  I don't want to lease one, give it back after 2-3 and not care what happens to it after that - scrapped prematurely.  At 5-10 not 25-30+.  I'd like them to last and be a solid long term ownership proposition for 2nd/3rd/4th owners as before. In fact very much like the '99 E46 saloon on 60k miles we still have bouncing around the family for 25 years. 

By coincidence - my current low mileage transport for fun and when we do different stuff far apart while living in the sticks.  Honda S2000. I will be unable to climb out of it before it fails.  

So by my own logic - I could double all my ongoing costs - the capital employed - insurance, service etc. etc.  And get a fancier Boxster.  Raise my consumption.  It comes hard changing thrifty habits.  

Confession time - in my wild and irresponsible youth - I should be ashamed to mention this on MSE.  

My confession.  I *leased* a new Toyota MR2 targa at age 28.  Quelle horreur.  Pretty thing.  Tinny in the Toyota bodywork fashion but reliable (while I had it new) - a bit quirky.  Mid-engine and pop up lights, take the top off. 
Not many of us have Ferrari money.  It was Turquoise Pearl which I loved and nobody much else did as they never did it again.  And deeply scary on the M6 in heavy storms with the lights on. Front end goes light.  

Still with our collection of extended family cars - average age 18 - we haven't been pulling our weight feeding the UK car retailers and lease financiers. My bad.

Our local dealer who inspects and ticks a "full Honda service history" box on the S2000 at 20. Has got ever smaller. And the MG dealer that shares the building has got ever larger.   I did not get "solidity" vibes off the MG Cyberster EV roadster they had in the showroom while waiting.  But like the Morgan I am glad a mad thing like that exists at all.

Ciprico said:

Love GM0's rant...

Reminiscent of Trainspotting's "Choose Life" monologue but for Boomers.....

(Meant in a nice way)

Keep em coming....

Glad you said "for boomers".  Not by boomers.  I am not a boomer.  Too young a recent retiree for that.  
I want the government to be *very* careful about the boomer cutoff date to gen-jones/gen-x when they invent some new targeted vindictive taxation specifically aimed at boomers.  Oh yes. We were at various points considered to be boomers - but so late that party was over.  These days I think 1964 is the cutoff generally?.  

Ah early gen-x.  The children of linear tv a few channels, TOTP - glamrock and prog and the winter of discontent - homework by candle light and then early stage thatcherism.  Is it a surprise we are odd in our own specific way.  
It was all very mid 80s yuppy world when I entered the workforce - though I was far from the world of $ braces and white 911s - working in a manufacturing setting in Staffordshire - learning the ropes as a student apprentice. More bacon and cheese stuffed oat cakes with chips and beans duck.  Lovely.  Cardiologist on standby.

Albermarle said:

A number of comments refer to bringing pension pots into the estate.
AIUI, unused pension pots will not be legally in the estate, just that the value will be included in IHT calculations.
So pension pots should still be omitted from any wills, and the trustees of the pension will still have the discretion to distribute it to beneficiaries ( guided by the names on the Expression of wish forms) .
If the estate + unused pension pot is liable for some IHT, I think that the Executor will have some discretion whether to pay it from the estate, or ask the pension provider to pay it ( or a mixture of both).
If the beneficiaries of the will and the pension are the same, their could be some advantage in paying from one or the other. If they are different it could get complicated, especially as it sounds like the new  process could be pretty complicated anyway, for lay executors at least .

This.  I scampered over it in my more generalised spiel.  One of the things I don't like about it.  

Suck it in to tax it but not quite.  And not allow fully fungible decisions on what tax to pay from where - property disposal, pension - which pension if more than one. Because stifling bureauracy and risk averse schemes terrified of doing the wrong thing across potentially complex situation and then being liable for fraud or error by a lay executor.  

It is VERY important not to make lay executors impossible and force us all into the rapacious arms of highstreet solicitors and similar spivs who will "do the forms" for a % of estate value.  Convenient for the industry.  Needs to be fought by the consumer.  On brand for MSE.  

The clear implication is to simplify affairs in good time and manage residue down - as discussed upthread.

squirrelpie said:

I've been reading this thread, but I think most of the discussion is pointless until we know what the rules actually become with regards to pensions. One thing I am now assuming is that our present lay executors will require some professional help, and there's some onus on us now to establish provisional relationships with that help. That's not straightforward as I expect most people we talk to now will be retired by the time of our second death, so it might be difficult to recommend somebody or even some firm to our executors.

Not entirely convinced

The current rules to count the drawdown residual value as part of the IHT calculation and to clawback primary residence relief are clearly declared.

Which is situational to each family. Assets, Liabilities, Income taken and behaviour during retirement - the subject of this thread. Unknown future for investments in general vs timing of deaths. Inflationary vs real growth.  Fiscal drag - the preferred tool of the Treasury.

I agree meanwhile the "scheme pays option" implementation rules are not clear (for executors) and this will take time to bed in.

You are also fundamentally correct that the rules then - some future then - 20-30+ years out - will not be the rules last week. Nor this week (2027 ruleset).  They will be fiddled with many times more by then to our collective disadvantage.  Properly and not very often would be better.  But they cannot resist.

Some strategies need to happen early and ongoing gradually if they are to be effective. 

Later rule changes may cut across what you did or failed to do.  There is little to be done about regulatory risk.  

Other than stay awake and moo loudly when they turn up looking hopeful with the milking machine.

All that can be done is to review the strategy when major tweaks happen - as here.

Do not fall into the "professional help is needed" trap.  It MUST NOT be mandatory. Nor defacto so.  Bad answer to be resisted.  Exploitation inevitably folllows from the spivs of law and retail financial services who will lobby to complicate it self-servingly.  Highstreet solicitors already take the michael massively on probate.  This is not to be encouraged.

To your general point I agree you can't set this up decades ahead ready to go and expect it to work. 
It will need to be purchased at the time.  

The best thing the retiree can do is shred/delete old files which don't relate any more to real assets.  Provide a simple cover sheet.  And have as simple affairs as can be arranged. Contact and account info. 

If you are lucky enough to have a competent family firm solicitor you have used and found satisfactory then that being known to executors and heirs is clearly helpful.  And very fortunate. Our experience across three was not good. One was good and fair value.  The others not so much - the expense - the incompetence - the lack of "firm" rather than personal ownership taken of cases. No - I would not dare arrange it in advance.  I will try to make it unnecessary.

Implication - Affairs - as simple as possible and no simpler

leosayer

JoeCrystal said:

leosayer said:

gm0 said:

"however, the tax free IHT allowance has been stagnant for a long time and should move up substantially...maybe 1 or 2 milion pounds plus the house allowance."

Oink Oink. Flap Flap.

I did some back of a fag packet maths the other day which told me that a full-time auto-enrolled worker on minimum wage would have a pension far larger than the current IHT allowance well before they turn 60. 

Hmm, I disagreed actually. Assume the employee is 22 years old, working 37.5 hours per week and earning £12.21 per hour, which translates to a salary of £23,809.50. And assuming the employer is average, which is the minimum auto-enrollment, they will contribute 3% & 5% from the employee, so the pension fund receives £117.13 per month in contributions. Thinking that pension fund returns kept pace with inflation at the bare minimum (aka, no return above inflation at all), it only added up to £53,411.28 pension fund in today's money. Of course, the assumption is that 1. Auto-enrollment remains the same, i.e., only applies to wages above £6,240. Always on minimum wage but kept up with inflation and 3. If the pension return is actually good enough, and lastly, the IHT allowance kept pace with inflation.

To see a pension pot reach above £325,000, the employee would have to hope for a return of 9% above inflation per year to reach £397,253. [Which may be unrealistic if it is sitting in a default fund. I only started my own pension scheme a few years before AE kicks in, and transferred it all in at a later date. Even then, I only saw 3% return per year since 2009, after accounting for inflation. So, how do you get that conclusion? What was the monthly contribution and the return, for example, to make it so much bigger than the current IHT allowance? 

EDIT: I had to update the figures since I accidentally used 40-hour weeks instead of 37.5-hour weeks when adding up the total.

Going back to my calc, I assumed that the IHT allowance wouldn't with inflation when in fact it has 'only' been frozen from 2009 until 2030.

SVaz

Why worry about it?   Within a decade, won’t  we all ‘ own nothing and be happy’  ,  mandated to travelling no further than 15 minutes and live on some kind of social credit given for ‘approved behaviour’  ?  

I’m only half joking. 

I’ll just be relieved to get through the next 10 years without civil war to be honest, IHT when I’m dead is the least of my concerns. 

I might spend my pension on a bunker 😉

MarzipanCrumble

SVaz said:

Why worry about it?   Within a decade, won’t  we all ‘ own nothing and be happy’  ,  mandated to travelling no further than 15 minutes and live on some kind of social credit given for ‘approved behaviour’  ?  

I’m only half joking. 

I’ll just be relieved to get through the next 10 years without civil war to be honest, IHT when I’m dead is the least of my concerns. 

I might spend my pension on a bunker 😉

Oh wow!  I think some of this may come true?  Populism will upend European de,mocracies including ours - look at Reform and USA, Trumpism.

As a definite IHT taxpayer on my death even before pension reform, I have sort of given up mitigating.  Yes, WOL policies (hate them); yes, gifting and surplus income gifting; no, don't spend enough; yes, got a complex about 'having enough'.  But tbh this post resonates in that circumstances can be beyond our control and, in the end, we won't have any say as we will be dead.  Let our inheritors sort it out - the fee for the inheritance!

Qyburn

leosayer said:

I did some back of a fag packet maths the other day which told me that a full-time auto-enrolled worker on minimum wage would have a pension far larger than the current IHT allowance well before they turn 60. 

Are you assuming none will be spent in retirement?

coyrls

I think 75 becomes an even bigger decision point than now with IHT on pensions.  As there is no income tax to pay on pensions on death pre-75, the IHT implications are neutral vs other assets but after 75 the combination of IHT and income tax on withdrawal make pensions a poor choice for inheritance.  I think I will be looking at annuity options at 75, to help preserve other assets for inheritance that will not attract income tax for the beneficiaries.

Albermarle

coyrls said:

I think 75 becomes an even bigger decision point than now with IHT on pensions.  As there is no income tax to pay on pensions on death pre-75, the IHT implications are neutral vs other assets but after 75 the combination of IHT and income tax on withdrawal make pensions a poor choice for inheritance.  I think I will be looking at annuity options at 75, to help preserve other assets for inheritance that will not attract income tax for the beneficiaries.

The 75 rule is not very logical, so could well get changed. In fact before the last budget, it was seen as the obvious change rather than the more controversial IHT change.