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Using an annuity to reduce IHT ?

Googling indicates it can, the capital used to buy the annuity is considered spent so is no longer subject to iht.

So far so good.

But when you die, the annuity stops, or passes to spouse which is iht exempt anyway.....

So where's the annuity/IHT benefit...?
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Comments

  • Somebody
    Somebody Posts: 217 Forumite
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
    Something on the lines of buying a joint whole of life assurance policy with the annuity income, and writing it into trust? 
  • Marcon
    Marcon Posts: 14,858 Forumite
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    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • dunstonh
    dunstonh Posts: 120,082 Forumite
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    Ciprico said:
    Googling indicates it can, the capital used to buy the annuity is considered spent so is no longer subject to iht.

    So far so good.

    But when you die, the annuity stops, or passes to spouse which is iht exempt anyway.....

    So where's the annuity/IHT benefit...?
    You are assuming the beneficiary is the spouse.   It doesn't have to be.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Ciprico
    Ciprico Posts: 661 Forumite
    Part of the Furniture 500 Posts Name Dropper
    Dunstonh,

    Can it be as simple as that ? ie just nominate ones children as beneficiaries of the end of term annuity  payment and avoid iht.

    The link on the other post above involves life insurance and trusts so looks a lot more expensive and complicated.....

    (I have gifted money to my adult kids and that didn't work out too well)

  • Albermarle
    Albermarle Posts: 28,716 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    edited 17 September at 12:00PM
    Ciprico said:
    Dunstonh,

    Can it be as simple as that ? ie just nominate ones children as beneficiaries of the end of term annuity  payment and avoid iht.

    The link on the other post above involves life insurance and trusts so looks a lot more expensive and complicated.....

    (I have gifted money to my adult kids and that didn't work out too well)

    From your earlier post, it seems you are talking about a Lifetime Annuity.
    In this case there is no 'end of term annuity payment'
    Depending on the annuity terms, there may be a provision for your Spouse to continue to receive monthly payments ( typically 50% of yours) but when they die that is the end of the annuity. So no IHT liability for your spouses estate as there is no money from the annuity.

    That would be the 'normal' scenario. However @dunstonh has indicated that rather than your spouse getting a reduced pension, you could nominate one of your offspring. I was not aware of that but I wonder if wires have got crossed somewhere about the type of annuity we are talking about ?
  • Bostonerimus1
    Bostonerimus1 Posts: 1,579 Forumite
    1,000 Posts Second Anniversary Name Dropper
    Ciprico said:
    Dunstonh,

    Can it be as simple as that ? ie just nominate ones children as beneficiaries of the end of term annuity  payment and avoid iht.

    The link on the other post above involves life insurance and trusts so looks a lot more expensive and complicated.....

    (I have gifted money to my adult kids and that didn't work out too well)

    From your earlier post, it seems you are talking about a Lifetime Annuity.
    In this case there is no 'end of term annuity payment'
    Depending on the annuity terms, there may be a provision for your Spouse to continue to receive monthly payments ( typically 50% of yours) but when they die that is the end of the annuity. So no IHT liability for your spouses estate as there is no money from the annuity.

    That would be the 'normal' scenario. However @dunstonh has indicated that rather than your spouse getting a reduced pension, you could nominate one of your offspring. I was not aware of that but I wonder if wires have got crossed somewhere about the type of annuity we are talking about ?
    If you nominate your children as beneficiaries for your lifetime income annuity I imagine the payout rate of the annuity would be far less than the nominal rate for say 65 year old spouses. If there's a lump sum payment to children at death that probably would be subject to IHT unless the life insurance/trust wrapper tactic is used.
    And so we beat on, boats against the current, borne back ceaselessly into the past.
  • MK62
    MK62 Posts: 1,773 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper
    One potential issue with this is that the annuity purchase is irreversible should the current or a future govt subsequently close this "loophole".....
  • HappyHarry
    HappyHarry Posts: 1,845 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper
    MK62 said:
    One potential issue with this is that the annuity purchase is irreversible should the current or a future govt subsequently close this "loophole".....
    There is no "loophole" to close. If an annuity is purchased with the entirety of one's pension pot then there is no residual pension funds to be taxed under inheritance tax. Using a pension to provide a lifetime income is the whole purpose of a pension. The "loophole", if any, was allowing unspent pension funds to sit outside one's estate for inheritance tax.

    It is currently possible to purchase annuities with guaranteed periods of 30 years - i.e. if the annuitant were to die within 30 years, then payments to beneficiaries will continue until the 30 years is up. We do not know yet how these residual payments might be treated for inheritance tax come April 2027.

    The plan mentioned in a post above is to use annuity income to purchase a Whole of Life policy. Again, no loophole - it is simply purchasing an insurance policy, and an individual's profit or loss on such a policy will correlate to a similar loss and profit on behalf of the insurance company - much the same as it is for any insurance. 

    HMRC will receive income tax on annuity payments, which will offset a significant part of any future inheritance tax shortfall due to annuity purchases. Indeed, many of those who previously would have accumulated pension funds and not spent them may now purchase annuities instead. This will give the government an immediate uplift in income tax collected, offset by a potential drop in predicated inheritance tax much further in the future - which is likely to be more than acceptable by our current government who will generally be planning to balance the books for a maximum of 5 or so years.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
  • Albermarle
    Albermarle Posts: 28,716 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    Also if you buy an annuity specifically to reduce your IHT liability, but do not actually need the income and end up saving it, you are back at square one.
    If you do spend it, you could have just drawn it down out of your pot every year, which would reduce your IHT liability anyway.
    It seems the only two simple ways to reduce your potential liability are to spend it or give it away, whether you go the annuity route or not.
  • Moonwolf
    Moonwolf Posts: 516 Forumite
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
    If you buy an annuity that you don't need as you have a large enough income from other sources, then potentially you can give the income to children as a "gift from income" which could be free of IHT. 

    You would need to keep good records and be sure that you had enough remaining income.

    Here is a nice guide, even so, if it were me, I would consider talking to an IFA on this one.

    https://techzone.aberdeenadviser.com/public/iht-est-plan/gifts-out-of-surplus-income
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