Using an annuity to reduce IHT ?

Albermarle

Bostonerimus1 said:

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.

I think this was mentioned by @dunstonh, but personally I have not heard of the possibility of naming children as beneficiaries from a lifetime annuity, although happy to be corrected.
As you say you would imagine that it would potentially decimate the annuity rate on offer.

ukdw

Bostonerimus1 said:

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.

The actual "market value" even from day 1 is I seem to remember less than the purchase amount - so I think there is an IHT benefit - see this old post I made around this time last year.

SmokeysTravels

When someone buys a joint life pension annuity the annuitant names who the second annuitant is going to be. This can only be one person. The annuity rate is based on the age and health of both annuitants. If you want to see how it affects the starting annuity amount go on the Moneyhelper web site and play with the annuity quotes. Try it with a second annuitant who is roughly the same age compared to one 30 years younger. With a joint life pension annuity when the first annuitant dies, the annuity will be paid at agreed percentage to the second annuitant for the rest of their life. If the second annuitant has already died then, assuming there were no other benefits such as a guaranteed period or value protection, the annuity just ends. If the first annuitant dies under age 75 then and remaining payments are paid tax free. If they die after age 75, then the recipient pays tax at their marginal rate of income tax. Currently, these payments are outside of the annuitant’s estate for IHT purposes. This is likely to change soon, but how this will work for annuity payments has yet to be finalised. 

For guaranteed periods and value protection, the annuitant can name multiple people or charities to receive them should they become payment and specify who gets which percentage. They should do this when they set the annuity up and then keep it up to date should their wishes change, in the same way you would with an expression of wish form with a pension. 

FIREDreamer

ukdw said:

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

That form cannot be used for an inflation linked annuity - but it doesn’t tell you what to do instead! 🙄

Albermarle

SmokeysTravels said:

When someone buys a joint life pension annuity the annuitant names who the second annuitant is going to be. This can only be one person. The annuity rate is based on the age and health of both annuitants. If you want to see how it affects the starting annuity amount go on the Moneyhelper web site and play with the annuity quotes. Try it with a second annuitant who is roughly the same age compared to one 30 years younger. With a joint life pension annuity when the first annuitant dies, the annuity will be paid at agreed percentage to the second annuitant for the rest of their life. If the second annuitant has already died then, assuming there were no other benefits such as a guaranteed period or value protection, the annuity just ends. If the first annuitant dies under age 75 then and remaining payments are paid tax free. If they die after age 75, then the recipient pays tax at their marginal rate of income tax. Currently, these payments are outside of the annuitant’s estate for IHT purposes. This is likely to change soon, but how this will work for annuity payments has yet to be finalised. 

For guaranteed periods and value protection, the annuitant can name multiple people or charities to receive them should they become payment and specify who gets which percentage. They should do this when they set the annuity up and then keep it up to date should their wishes change, in the same way you would with an expression of wish form with a pension. 

Thanks for the clarification in your last paragraph, that you can name multiple people in this scenario, I was not aware of that.
I understand that it is not yet clear how IHT will apply to payments like these.

Regarding your comments in bold.
The second annuitant will normally be a Spouse ( not always of course) so no IHT liability in any form for anything that passes on first death. On second death the annuity dies with it so to speak, so again no IHT liability.
There are no plans to change this, not sure how you would anyway.
I suppose if the second annuitant was not a spouse, there could be a grey area about IHT liability I guess.
If you meant that the age 75 rule might get changed, then that is a possibility, but that affects income tax , not IHT.

SmokeysTravels

Sorry, I should have been clearer! I meant how ongoing guaranteed period and value protection are going to be treated for IHT purposes has not yet been finalised. Personally, I believe that this would be incredibly harsh as when you buy a lifetime pension annuity you can’t change it. So these people who already have them, and potentially will find that these payments might now have IHT liabilities (as well as income tax) can’t do anything about it, whereas those with a SIPP still has flexibility to potentially avoid it. 

Albermarle

SmokeysTravels said:

Sorry, I should have been clearer! I meant how ongoing guaranteed period and value protection are going to be treated for IHT purposes has not yet been finalised. Personally, I believe that this would be incredibly harsh as when you buy a lifetime pension annuity you can’t change it. So these people who already have them, and potentially will find that these payments might now have IHT liabilities (as well as income tax) can’t do anything about it, whereas those with a SIPP still has flexibility to potentially avoid it. 

However if these payments are not subject to IHT, there is going to be a big surge in people buying annuities with guaranteed protection/value protection !

FIREDreamer

Albermarle said:

SmokeysTravels said:

Sorry, I should have been clearer! I meant how ongoing guaranteed period and value protection are going to be treated for IHT purposes has not yet been finalised. Personally, I believe that this would be incredibly harsh as when you buy a lifetime pension annuity you can’t change it. So these people who already have them, and potentially will find that these payments might now have IHT liabilities (as well as income tax) can’t do anything about it, whereas those with a SIPP still has flexibility to potentially avoid it. 

However if these payments are not subject to IHT, there is going to be a big surge in people buying annuities with guaranteed protection/value protection !

… and a ready market for government debt!

Bostonerimus1

ukdw said:

Bostonerimus1 said:

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.

The actual "market value" even from day 1 is I seem to remember less than the purchase amount - so I think there is an IHT benefit - see this old post I made around this time last year.

Any annuity lump sum or guaranteed benefit is going to be less than the purchase amount and will presumably attract IHT if left to a non-spouse. The same goes for a DC pension. The amount of IHT is going to depend on the amounts left to the non-spouse beneficiary and you'd hope for a big IHT bill in either case as that means a bigger amount for the beneficiary too. I don't see the material difference wrt IHT unless we start talking about insurance wrappers or maybe lifetime income annuities for children...if that's even a thing.

ukdw

Bostonerimus1 said:

ukdw said:

Bostonerimus1 said:

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Any annuity lump sum or guaranteed benefit is going to be less than the purchase amount and will presumably attract IHT if left to a non-spouse. 

In the example I gave - purchase amount £200k, annual amount £12k for 30 years, so £360k guaranteed amount from day 1 - so guarantee worth quite a lot more than purchase amount in pure cash terms and ignoring likely growth of the £200k.

 Market value £133k - so IHT liability for non spouse 40% of £133k - which is about a 30% reduction compared to the £200k being left in drawdown, and a much bigger reduction if the £200k were left invested and grew to 360k or more.

Appreciate though that this calculator doesn't work on RPI annuities.

Also I guess they might change the way they calculate market values to make annuity guarantees as bad in IHT terms as DC pensions post 2027.