The inevitable pre-budget speculation on pensions

kinger101

Cobbler_tone said:

kinger101 said:

I still think they'll default to the easiest option of extending fiscal drag.  

That is probably the 'fingers in the ears' viewpoint. They are quite obviously going to have to generate/save funds from somewhere....possibly not pensions, for now. 
Gambling tax seems to be in the news today.

Really tricky time for them as they need to make some tangible changes, without decreasing their popularity further. Whilst the (new) other lot have 20 odd pages of crowd pleasing pledges (not pleasing for all of course) on the horizon. The issue is that too many people are not wise enough to read between the lines and there seems to be a constant thirst for instant gratification, so those out of power hold the next deck of cards....and repeat. 

I wouldn't say it's fingers in ears.  It's just quite a pragmatic option that actually raises quite a lot of tax without causing that many ripples. 

I read somewhere that by 2028, it will already be equivalent to the income raised by bumping up income tax by 2 p.

When you work out the mechanics though, certain groups are targeted more heavily than others.  

I also saw another article in the independent that fiscal drag has bought the number of pensioners paying 40 pc tax to 1 million.

Faced with an easy yet effective option....

kinger101

westv said:

My current speculation is that the following will happen:-
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I think you're dead wrong on the third point but broadly concur.

SmokeysTravels

hotncold47 said:

 I must stop reading all this pre budget speculation I'm starting to get twitchy now. 

Could someone put me straight about the TFLS situation when you are approaching 75? Does it lose its tax free status or am I getting brain fog. I know I can only add £2880 until 75 if not working.

 No - you don’t lose TFLS when you reach age 75. Some legacy products will require you to take the benefits or transfer them to a more modern product that does allow the pension to stay invested after age 75.
If you die before age 75 then the benefits are paid income tax free to the beneficiary. After age 75 the beneficiary pays income tax at their marginal rate, so there is often an argument to take the TFLS at age 75.

Albermarle

SmokeysTravels said:

hotncold47 said:

 I must stop reading all this pre budget speculation I'm starting to get twitchy now. 

Could someone put me straight about the TFLS situation when you are approaching 75? Does it lose its tax free status or am I getting brain fog. I know I can only add £2880 until 75 if not working.

 No - you don’t lose TFLS when you reach age 75. Some legacy products will require you to take the benefits or transfer them to a more modern product that does allow the pension to stay invested after age 75.
If you die before age 75 then the benefits are paid income tax free to the beneficiary. After age 75 the beneficiary pays income tax at their marginal rate, so there is often an argument to take the TFLS at age 75.

Not necessarily at 75 , but in the years leading up to that age.
Also if you have a big pot that maybe affected by the tax free lump sum limit ( £268K) then can make sense to take more TFLS earlier than you would otherwise.
That is because that figure is frozen for some indeterminate period and hopefully your pot will be growing.

aroominyork

LHW99 said:

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

Spouse 2 would pay income tax on withdrawals (but not IHT). Presumably it wouldn't change back to IT-free when passed to beneficiaries. However if Spouse 2 had their own SIPP, that would pass to beneficiaries income-tax free on death before 75.

However IHT on the pensions could come into play after 2027 on second death.

And after the death of Spouse 1, does Spouse 2 get to make 25% tax free withdrawals on uncrystallised funds? 

DRS1

aroominyork said:

LHW99 said:

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

Spouse 2 would pay income tax on withdrawals (but not IHT). Presumably it wouldn't change back to IT-free when passed to beneficiaries. However if Spouse 2 had their own SIPP, that would pass to beneficiaries income-tax free on death before 75.

However IHT on the pensions could come into play after 2027 on second death.

And after the death of Spouse 1, does Spouse 2 get to make 25% tax free withdrawals on uncrystallised funds? 

No - the TFLS dies with the member.

aroominyork

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

We are tied at 1-1. Does anyone know the correct answer? 

- Spouse 1 dies over 75, leaving SIPP to Spouse 2

- Spouse 2 dies under 75

- Do beneficiaries of the twice-inherited SIPP pay income tax on withdrawals?

LHW99 said:

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

Spouse 2 would pay income tax on withdrawals (but not IHT). Presumably it wouldn't change back to I[H]T-free when passed to beneficiaries. However if Spouse 2 had their own SIPP, that would pass to beneficiaries income-tax free on death before 75.

SmokeysTravels said:

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

No - if spouse 2 dies under 75 then this (currently) will be income tax free for their beneficiaries on withdrawal. If they keep it and die over 75 then it becomes liable for income tax again for their beneficiaries. 

MetaPhysical

Cus said:

Ah Rach, just stick another penny on the basic rate of income tax and a couple of more on the higher rate and be done with it..

She may do yet.

aroominyork

I’ve been working the numbers and I think there is little downside to taking out the TFLS if you can minimize tax with it unwrapped, eg in a low coupon gilt. Could someone please check this, based on a non-spouse beneficiary, post-2027 IHT changes and a 20% marginal tax rate.

1a)  Die under 75 with no TFLS taken

-  £100k in SIPP

-  £60k after IHT

-  No income tax paid by beneficiary so net £60k

1b)  Die under 75 with full TFLS taken

-  £75k SIPP + £25k unwrapped

-  £45k SIPP + £15k unwrapped after IHT = £60k

-  No income tax paid by beneficiary so net £60k

2a)  Die over 75 with no TFLS taken

-  £100k in SIPP

-  £60k after IHT

-  Income tax paid by beneficiary so net £48k

2b)  Die over 75 with full TFLS taken

-  £75k SIPP + £25k unwrapped

-  £45k SIPP + £15k unwrapped after IHT = £60k

-  Income tax paid by beneficiary on SIPP so net £36k + £15k unwrapped = £51k.

So for legator deaths under 75 there is no difference; for deaths over 75 it pays to have taken the full TFLS. Have I missed something (I usually have...)?

PS   A bit more number-crunching and there is a slight reduction in overall value if I withdraw 25% tax-free and put it in a low growth investment (eg low coupon gilt) while keeping the other 75% in the SIPP in equities. That comes out slightly worse than if I keep the whole lot in a SIPP in the same mix of 75% equity / 25% bonds, with the equities growing over time, before making a tax-free withdrawal. As @DRS1 said on this thread "It allows you to get the expected market gains on the tax free element as well as the taxable element." 

DRS1

aroominyork said:

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

We are tied at 1-1. Does anyone know the correct answer? 

- Spouse 1 dies over 75, leaving SIPP to Spouse 2

- Spouse 2 dies under 75

- Do beneficiaries of the twice-inherited SIPP pay income tax on withdrawals?

LHW99 said:

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

Spouse 2 would pay income tax on withdrawals (but not IHT). Presumably it wouldn't change back to I[H]T-free when passed to beneficiaries. However if Spouse 2 had their own SIPP, that would pass to beneficiaries income-tax free on death before 75.

SmokeysTravels said:

aroominyork said:

Bringing the House back to order... spouse 1 dies over 75, leaving SIPP to spouse 2 who dies under 75. Do beneficiaries of the SIPP pay income tax on withdrawals? 

No - if spouse 2 dies under 75 then this (currently) will be income tax free for their beneficiaries on withdrawal. If they keep it and die over 75 then it becomes liable for income tax again for their beneficiaries. 

According to Aviva @SmokeysTravels is right.
What happens to my SIPP when I die? - Aviva

However in the scenario you are painting I see Spouse 2 as the much younger Trophy wife and she will have spent the lot on gold lame cosmetic surgery and toyboys so tax won't be an issue