Using an annuity to reduce IHT ?

dunstonh

RogerPensionGuy said:

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. 

Value protect will be included in the IHT calculation.  

FIREDreamer

dunstonh said:

RogerPensionGuy said:

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. 

Value protect will be included in the IHT calculation.  

What about the remainder of a guaranteed period?

eg dies within 5 years and the annuity is guaranteed for 20 years and the spouse is also dead?

dunstonh

FIREDreamer said:

dunstonh said:

RogerPensionGuy said:

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. 

Value protect will be included in the IHT calculation.  

What about the remainder of a guaranteed period?

eg dies within 5 years and the annuity is guaranteed for 20 years and the spouse is also dead?

Unclear at this stage.  The July 2025 update text suggests the guarantee period is included as a "relevant death benefit" to be included in the IHT calculation.   Most reports that are based on their reading of the text state that guaranteed periods on annuities are unclear and need refinement.

There doesn't appear to be anything to show how indexed annuities would be treated.  In particular, RPI or LPI, where the indexed amount after the remaining term would not be known.    

There is another consultation that has just closed, and more rules/information are to be published.   It was raised in the consultation that someone taking a guarantee period receives a reduced income from the outset, and the intention is to ensure that individuals receive at least some value from their pension in the event of their early death after receiving their annuity.   It was felt that the cost consequences (longer guaranteed periods get lower annuity rates) doesn't fit with HMRC's policy intent to capture people using pensions for wealth transfer.

RogerPensionGuy

In answer to a few points. 

My plan is to just get a single life annuity or two. 

Any guarantee period(years) or value protection % I adopt will water down the overall payout rate.

Any payouts or income generated if I expire before data points are achieved will be potentially subjected to IHT and income tax as will any output left in my SIPP I'm guessing and maybe a new tax will be invented I wouldn't be surprised.

My rational for doing annuities is just a bit of balance planning and guessing.

As previously mentioned, look how SIPP IHT rule changes panned out for people/families who transferred out of good DB pensions in to DC SIPPs trying to plan under current rules.

Only time will tell how my plan works out, but again IHT is low on my list of priorities thankfully. 

Bostonerimus1

RogerPensionGuy said:

In answer to a few points. 

My plan is to just get a single life annuity or two. 

Any guarantee period(years) or value protection % I adopt will water down the overall payout rate.

Any payouts or income generated if I expire before data points are achieved will be potentially subjected to IHT and income tax as will any output left in my SIPP I'm guessing and maybe a new tax will be invented I wouldn't be surprised.

My rational for doing annuities is just a bit of balance planning and guessing.

As previously mentioned, look how SIPP IHT rule changes panned out for people/families who transferred out of good DB pensions in to DC SIPPs trying to plan under current rules.

Only time will tell how my plan works out, but again IHT is low on my list of priorities thankfully. 

I don't really see much difference from spending to buy and annuity with a spouse as a beneficiary and just spending your DC drawdown. Both come out of your DC pot. 

If you name a child or grand child as a lifetime income beneficiary and there is no value transfer other than lifetime income for the young beneficiary maybe IHT is avoided, but the annuity payout rate will be far lower than the usual rates and I imagine getting a quote might be quite difficult.

RogerPensionGuy

Bostonerimus1 said:

RogerPensionGuy said:

In answer to a few points. 

My plan is to just get a single life annuity or two. 

Any guarantee period(years) or value protection % I adopt will water down the overall payout rate.

Any payouts or income generated if I expire before data points are achieved will be potentially subjected to IHT and income tax as will any output left in my SIPP I'm guessing and maybe a new tax will be invented I wouldn't be surprised.

My rational for doing annuities is just a bit of balance planning and guessing.

As previously mentioned, look how SIPP IHT rule changes panned out for people/families who transferred out of good DB pensions in to DC SIPPs trying to plan under current rules.

Only time will tell how my plan works out, but again IHT is low on my list of priorities thankfully. 

I don't really see much difference from spending to buy and annuity with a spouse as a beneficiary and just spending your DC drawdown. Both come out of your DC pot. 

If you name a child or grand child as a lifetime income beneficiary and there is no value transfer other than lifetime income for the young beneficiary maybe IHT is avoided, but the annuity payout rate will be far lower than the usual rates and I imagine getting a quote might be quite difficult.

If I buy a single life annuity with a spouse as beneficiary to get cash if I expire before value protection or guarantee period reached the cash flow generated will fall in to the potential 1M IHT Nil Rate Band family allowance.

Whereas if beneficiary is a child or friend, any payout goes outside the family IHT zone potentially.

We just don't know the future and how IHT or income tax will be applied or not applied depending on which type of product used as the rules just change. 

It's like playing a long long game of cards and the rules change throught the game. 

ukdw

My understanding is that the current approach IHT and  standard annuities is that the 'market value' of any remaining guarantee is considered for IHT - I don't see why this would need to change.

The calculator is here - it does from day1 reduce the amount in the estate, and the value gradually decreases as the guarantee starts to run out. 

For a 30 year guarantee I guess there is more than a 50:50 chance though that the annuity will outlive the purchaser - so some IHT liability would remain.

https://www.gov.uk/government/publications/inheritance-tax-guaranteed-annuity-calculator

QrizB

Bostonerimus1 said:

... the annuity payout rate will be far lower than the usual rates and I imagine getting a quote might be quite difficult.

You're describing a joint life annuity. That's not what's being discussed.

RogerPensionGuy said:

If I buy a single life annuity with a spouse as beneficiary to get cash if I expire before value protection or guarantee period reached the cash flow generated will fall in to the potential 1M IHT Nil Rate Band family allowance.
Whereas if beneficiary is a child or friend, any payout goes outside the family IHT zone potentially.

The rate for a single life annuity doesn't depend on who you name as beneficiary for any value protection or guarantee period.

RogerPensionGuy

QrizB said:

Bostonerimus1 said:

... the annuity payout rate will be far lower than the usual rates and I imagine getting a quote might be quite difficult.

You're describing a joint life annuity. That's not what's being discussed.

RogerPensionGuy said:

If I buy a single life annuity with a spouse as beneficiary to get cash if I expire before value protection or guarantee period reached the cash flow generated will fall in to the potential 1M IHT Nil Rate Band family allowance.
Whereas if beneficiary is a child or friend, any payout goes outside the family IHT zone potentially.

The rate for a single life annuity doesn't depend on who you name as beneficiary for any value protection or guarantee period.

I'm getting a bit confusing I think.

My view is a single life annuity gives a better % payout during my life than including a spouce and I have currently decided this is the way to go due spouce would have sufficient cash flows if I die 1st.

I just feel using the value protection or guarantee period gives a little balance and beneficiary could be spouce, children, friends, charity or anybody. 

The IHT and income tax treatment of any payouts to anyone is just unknown in the future, I just look at the way the LTA was invented, treated then scrapped and likewise the massive change how SIPPs get treated for IHT from April 2027.

Its all unknowns unfortunately. 

Bostonerimus1

QrizB said:

Bostonerimus1 said:

... the annuity payout rate will be far lower than the usual rates and I imagine getting a quote might be quite difficult.

You're describing a joint life annuity. That's not what's being discussed.

RogerPensionGuy said:

If I buy a single life annuity with a spouse as beneficiary to get cash if I expire before value protection or guarantee period reached the cash flow generated will fall in to the potential 1M IHT Nil Rate Band family allowance.
Whereas if beneficiary is a child or friend, any payout goes outside the family IHT zone potentially.

The rate for a single life annuity doesn't depend on who you name as beneficiary for any value protection or guarantee period.

This is sort of my point. Any death benefit from a single life annuity, like a guarantee period or a lump sum, left to someone will be liable to IHT. So I don't see any IHT advantage in buying an annuity as any balance left in a DC pension at death will also be liable to IHT...with the usual spousal exceptions.

But would a joint life annuity with children as beneficiaries get around IHT? The payout rate would be lower than usual of course.