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Using an annuity to reduce IHT ?

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Comments

  • Fermion
    Fermion Posts: 194 Forumite
    Eighth Anniversary 100 Posts Name Dropper Combo Breaker
    Interesting that I have recently decided to convert some of my drawdown pension pot into an annuity, primarily to avoid future IHT charges on the estate but also to provide a significant  increased income (which can be gifted to our adult children) as well as reducing the impact and risk of a future stock market crash.

    In terms of background, I crystalised my DC Pension in 2016 taking my 25% lump sum leaving me with a pot of £700K which I invested in a range of equity income funds and blue chip income shares. The original plan was to only take the natural yield and ultimately leave my pension pot to my wife and then to out 2 children as beneficiaries. We took advice a number of years ago from Estate Planning specialists who recommended this approach as pensions at the time were outside the scope of IHT.

    Two things have happened since then;
    (a) after even taking about 3.8%/annum drawdown from my pot, this has still grown to over £960K
    (b) Rachel Reeves changed the goalposts on IHT for pensions

    If you include my wife's smaller Drawdown pot, we would be likely to have a combined pot of about £1.2M which would potentially mean a total estate value in excess of £2.7M - the point at which RNRB relief drops to zero.

    As a result, I have decided to convert £300K of my pension into an Annuity and my wife has decided to convert all of her pot into an annuity as well. My objective is to leave no more than £500K in my pot. That way keeping the estate value below £2M and keeping the full RNRB. That would save our beneficiaries about £380K in potential estate IHT

    Given the Annuity quotes we have obtained -  100% spouse and 5 years guarantee with a return of around 8.3% (because of out age) it seems a no brainer. Lots of Pros and not too many Cons.
  • DRS1
    DRS1 Posts: 1,603 Forumite
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    Make sure any payment under the guarantee period doesn't end up in your estate.
  • poseidon1
    poseidon1 Posts: 1,749 Forumite
    1,000 Posts Second Anniversary Name Dropper
    Fermion said:
    Interesting that I have recently decided to convert some of my drawdown pension pot into an annuity, primarily to avoid future IHT charges on the estate but also to provide a significant  increased income (which can be gifted to our adult children) as well as reducing the impact and risk of a future stock market crash.

    In terms of background, I crystalised my DC Pension in 2016 taking my 25% lump sum leaving me with a pot of £700K which I invested in a range of equity income funds and blue chip income shares. The original plan was to only take the natural yield and ultimately leave my pension pot to my wife and then to out 2 children as beneficiaries. We took advice a number of years ago from Estate Planning specialists who recommended this approach as pensions at the time were outside the scope of IHT.

    Two things have happened since then;
    (a) after even taking about 3.8%/annum drawdown from my pot, this has still grown to over £960K
    (b) Rachel Reeves changed the goalposts on IHT for pensions

    If you include my wife's smaller Drawdown pot, we would be likely to have a combined pot of about £1.2M which would potentially mean a total estate value in excess of £2.7M - the point at which RNRB relief drops to zero.

    As a result, I have decided to convert £300K of my pension into an Annuity and my wife has decided to convert all of her pot into an annuity as well. My objective is to leave no more than £500K in my pot. That way keeping the estate value below £2M and keeping the full RNRB. That would save our beneficiaries about £380K in potential estate IHT

    Given the Annuity quotes we have obtained -  100% spouse and 5 years guarantee with a return of around 8.3% (because of out age) it seems a no brainer. Lots of Pros and not too many Cons.

    I like how you have calmly adjusted your pensions and estate planning objectives, to take account of the changing tax landscape without the usual histrionics and gnashing of teeth.
  • kinger101
    kinger101 Posts: 6,603 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    edited 26 September at 7:55PM
    I personally don't think it is a good reason to buy an annuity.  The IHT is only mitigated because the annuity dies with you (or spouse).

    Gifts out of income can still be made out of regular drawdowns.


    "Real knowledge is to know the extent of one's ignorance" - Confucius
  • LHW99
    LHW99 Posts: 5,350 Forumite
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    kinger101 said:
    I personally don't think it is a good reason to buy an annuity.  The IHT is only mitigated because the annuity dies with you (or spouse).

    Gifts out of income can still be made out of regular drawdowns.



    At the moment :*
  • I've also been looking at annuities being used to tick many boxes and with a normal annuity purchased from a SIPP with a guarantee period or value protection and example putting children or friends as beneficiaries looks like if a beneficiary payment is made due expired before whatever data point, the payments or payment won't be included in the deceased persons estate, so no IHT(currently) but beneficiaries will pay their marginal rate of income tax.

    Reference PLAs (purchased life annuities) these will attract IHT and income tax.

    ***

    The above may also fit well in to gifting from surplus income game. 

    Fagg packet example below of a 500K SIPP at age 65 assuming other income covers all living costs/lifestyle. 

    200K level annuity 10 years. 

    300K RPI annuity life. 

    Both annuities have value protection or guarantee cover and children or friends as beneficiary people named on the policies. 

    In the years going forwards from now, income tax paid on payments and surplus gifting can be done if desired. 


  • coyrls
    coyrls Posts: 2,517 Forumite
    Part of the Furniture 1,000 Posts 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.

    After 75, income tax will be payable in addition to IHT for non-spouse inherited pensions.  For non-pension non-spouse inheritance, IHT is payable but no income tax.  After 75, it makes sense to maximise non-pension money inheritance at the expense of pension inheritance and one way to achieve this is to purchase an annuity at 75 to provide an income and allow non-pension money to be preserved for inheritance.
  • Bostonerimus1
    Bostonerimus1 Posts: 1,579 Forumite
    1,000 Posts Second Anniversary Name Dropper
    edited 30 September at 4:56AM
    I've also been looking at annuities being used to tick many boxes and with a normal annuity purchased from a SIPP with a guarantee period or value protection and example putting children or friends as beneficiaries looks like if a beneficiary payment is made due expired before whatever data point, the payments or payment won't be included in the deceased persons estate, so no IHT(currently) but beneficiaries will pay their marginal rate of income tax.

    Reference PLAs (purchased life annuities) these will attract IHT and income tax.

    ***

    The above may also fit well in to gifting from surplus income game. 

    Fagg packet example below of a 500K SIPP at age 65 assuming other income covers all living costs/lifestyle. 

    200K level annuity 10 years. 

    300K RPI annuity life. 

    Both annuities have value protection or guarantee cover and children or friends as beneficiary people named on the policies. 

    In the years going forwards from now, income tax paid on payments and surplus gifting can be done if desired. 


    How much does an annuity like that payout and what is the payout period for the beneficiary children?
    And so we beat on, boats against the current, borne back ceaselessly into the past.
  • I've also been looking at annuities being used to tick many boxes and with a normal annuity purchased from a SIPP with a guarantee period or value protection and example putting children or friends as beneficiaries looks like if a beneficiary payment is made due expired before whatever data point, the payments or payment won't be included in the deceased persons estate, so no IHT(currently) but beneficiaries will pay their marginal rate of income tax.

    Reference PLAs (purchased life annuities) these will attract IHT and income tax.

    ***

    The above may also fit well in to gifting from surplus income game. 

    Fagg packet example below of a 500K SIPP at age 65 assuming other income covers all living costs/lifestyle. 

    200K level annuity 10 years. 

    300K RPI annuity life. 

    Both annuities have value protection or guarantee cover and children or friends as beneficiary people named on the policies. 

    In the years going forwards from now, income tax paid on payments and surplus gifting can be done if desired. 


    How much does an annuity like that payout and what is the payout period for the beneficiary children?
    IIRC a single life level annuity at age 65 is 7.5% and RPI was like a 5.3% starting point. 

    Then just apply a value protection % index or a guarantee period, the bigger % value protection or longer the guarantee period the more the output is reduced. 

    The value protection period time is adjusted via the protection % factor, so probably 5 to 15 years maybe top of my memory. 

    The guarantee period essentially the same, but up to 30 years can be applied, 30 years will really slug the out put as 30 years is much more like a term annuity of 30 years I guess. 

    I played on Moneyhelper.co.uk for hours and hours. 

    I viewed all the outputs as my lifestyle & living standards in to an unknown personal future verses potentially leaving a few more pounds for children or friends etc. 

    This current view of buying annuities slightly driven by SIPP IHT changes has focused my mind on gifting dynamics from surplus income, my view being if in the early years I decided to gift X amount of pounds to children or friends and did for years & years, but then later on I need or feel I need to reduce or stop gifting cash, I'm just trying to wonder how this sequence would pan out and I'm thinking it may not be nice indeed. 

    Thankfully I'm not too bothered about IHT, unlike many friends & families I know and my children are completely self sufficient, but I know many people like me in their later life and totally fixiated on IHT and others. 




  • Bostonerimus1
    Bostonerimus1 Posts: 1,579 Forumite
    1,000 Posts Second Anniversary Name Dropper
    I've also been looking at annuities being used to tick many boxes and with a normal annuity purchased from a SIPP with a guarantee period or value protection and example putting children or friends as beneficiaries looks like if a beneficiary payment is made due expired before whatever data point, the payments or payment won't be included in the deceased persons estate, so no IHT(currently) but beneficiaries will pay their marginal rate of income tax.

    Reference PLAs (purchased life annuities) these will attract IHT and income tax.

    ***

    The above may also fit well in to gifting from surplus income game. 

    Fagg packet example below of a 500K SIPP at age 65 assuming other income covers all living costs/lifestyle. 

    200K level annuity 10 years. 

    300K RPI annuity life. 

    Both annuities have value protection or guarantee cover and children or friends as beneficiary people named on the policies. 

    In the years going forwards from now, income tax paid on payments and surplus gifting can be done if desired. 


    How much does an annuity like that payout and what is the payout period for the beneficiary children?
    IIRC a single life level annuity at age 65 is 7.5% and RPI was like a 5.3% starting point. 

    Then just apply a value protection % index or a guarantee period, the bigger % value protection or longer the guarantee period the more the output is reduced. 

    The value protection period time is adjusted via the protection % factor, so probably 5 to 15 years maybe top of my memory. 

    The guarantee period essentially the same, but up to 30 years can be applied, 30 years will really slug the out put as 30 years is much more like a term annuity of 30 years I guess. 

    I played on Moneyhelper.co.uk for hours and hours. 

    I viewed all the outputs as my lifestyle & living standards in to an unknown personal future verses potentially leaving a few more pounds for children or friends etc. 

    This current view of buying annuities slightly driven by SIPP IHT changes has focused my mind on gifting dynamics from surplus income, my view being if in the early years I decided to gift X amount of pounds to children or friends and did for years & years, but then later on I need or feel I need to reduce or stop gifting cash, I'm just trying to wonder how this sequence would pan out and I'm thinking it may not be nice indeed. 

    Thankfully I'm not too bothered about IHT, unlike many friends & families I know and my children are completely self sufficient, but I know many people like me in their later life and totally fixiated on IHT and others. 




    Surely including children with long life expectancies as beneficiaries will drastically reduce the payout rate and if you just leave them a lump sum won't that be included in the estate for IHT?
    And so we beat on, boats against the current, borne back ceaselessly into the past.
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