Using an annuity to reduce IHT ?

SnowMan

One niche example where an annuity might be considered in some circumstances as far as I can see, when thinking about inheritance tax, would be an unmarried couple

If A has a pension which they use to buy a joint life annuity for themselves and their partner B, then if A dies first then B will continue to receive the annuity until B's death (or the percentage of the annuity paid to A depending on the % chosen). No inheritance tax will be paid on A's death in relation to that annuity even though spouse's inheritance tax exemption doesn't apply. 

As it says in the consultation response in annex C

https://www.gov.uk/government/consultations/inheritance-tax-on-pensions-liability-reporting-and-payment/outcome/inheritance-tax-on-pensions-liability-reporting-and-payment-summary-of-responses

Joint life annuity products are principally designed for, but not limited to, couples. Where a member chooses to take a joint life annuity, it continues to be payable to the chosen survivor after the member’s death (usually at a reduced rate). If the chosen survivor was a spouse or civil partner the usual Inheritance Tax exemption would apply.
For unmarried couples and children, the rights of the survivor are separate from the rights of the member. The survivor’s rights (paid from a joint life annuity) are not part of the member’s estate and are not in scope of Inheritance Tax.

Bostonerimus1

ukdw said:

Bostonerimus1 said:

ukdw said:

Bostonerimus1 said:

 l

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.

So you're saying that the actual guaranteed amount going to the beneficiary does not attract IHT just the market value? I suppose I can see that if the amount isn't a lump sum. But in your example where did you get the payout rate of 6% for a 30 year guarantee?

QrizB

Bostonerimus1 said:

... But in your example where did you get the payout rate of 6% for a 30 year guarantee?

I can't speak for @ukdw but I've just got a quote from HL for a flat single-life annuity with a 30-year guarantee and it's offered me this for £100k (ie. £133k less TFLS):

So it seems a reasonable assumption.

ukdw

Its even  better than 6% for me now - I don't think I will get another level annuity though- might get RPI next - but IFA not keen on RPI annuities.

RogerPensionGuy

ukdw said:

Its even  better than 6% for me now - I don't think I will get another level annuity though- might get RPI next - but IFA not keen on RPI annuities.

Why is IFA not keen on RPI? 

Bostonerimus1

ukdw said:

Bostonerimus1 said:

ukdw said:

Bostonerimus1 said:

 l

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.

So if the annuitant dies on day 1, the estate pays 40% of 133k in IHT and the beneficiary gets a 30 year income of 12k a year which totals 360k. What happens if the beneficiary dies? does their beneficiary get what's left of the guarantee? Anyway if the 200k is just left to the beneficiary the estate will have to pay 40% tax on that so the beneficiary gets 120k, If they put that away for 30 years they only need 4% average annual return to end up with 390k. Obviously they haven't had the utility of any income and there's risk involved, but paying less IHT might not be the best way to pass money on in all circumstances.

ukdw

Why is IFA not keen on RPI? 

Due  mainly to needing to compare like for like terms (i.e. 30 year guarantee) - and their tool saying the percentage likelihood of RPI working out better than level overall being pretty low.

Example equivalent RPI quote - which I think would need average inflation above 3.5% to break even over the 30 year period.

QrizB

Bostonerimus1 said:

So if the annuitant dies on day 1, the estate pays 40% of 133k in IHT and the beneficiary gets a 30 year income of 12k a year which totals 360k. What happens if the beneficiary dies? does their beneficiary get what's left of the guarantee? Anyway if the 200k is just left to the beneficiary the estate will have to pay 40% tax on that so the beneficiary gets 120k, If they put that away for 30 years they only need 4% average annual return to end up with 390k. Obviously they haven't had the utility of any income and there's risk involved, but paying less IHT might not be the best way to pass money on in all circumstances.

If you'd like to compare on like terms, saving £1k per month for 30 years at 4% gives you £693k at the end of it.

You'd need an annual return of about 9.5% before the lump sum wins out, and that would see both pots approaching £2M at the end.

Bostonerimus1

QrizB said:

Bostonerimus1 said:

So if the annuitant dies on day 1, the estate pays 40% of 133k in IHT and the beneficiary gets a 30 year income of 12k a year which totals 360k. What happens if the beneficiary dies? does their beneficiary get what's left of the guarantee? Anyway if the 200k is just left to the beneficiary the estate will have to pay 40% tax on that so the beneficiary gets 120k, If they put that away for 30 years they only need 4% average annual return to end up with 390k. Obviously they haven't had the utility of any income and there's risk involved, but paying less IHT might not be the best way to pass money on in all circumstances.

If you'd like to compare on like terms, saving £1k per month for 30 years at 4% gives you £693k at the end of it.

You'd need an annual return of about 9.5% before the lump sum wins out, and that would see both pots approaching £2M at the end.

Good point, but there would perhaps be income tax on the annuity payments and I took the whole IHT amount off the DC lump sum and it wasn't accounted for with the annuity. So 53k needs to be paid by the estate for the annuity IHT and that isn't factored into the calculation. If we pay 20% income tax so have 9.6k/year to compound and use the first 4.5 years to "pay back" the 53k in IHT then the DC lump sum over 30 years beats the annuity payments compounding for 25.5 years at just less than 5% annual return.