Is it worth me continuing my SIPP?

mrj999

Some years ago, after retirement, I set up a SIPP purely for inheritance tax purposes. I have no non-pension income, so I'm limited to £2880 net payment (£3600 gross). I've been 'fiscally dragged' into the 40% tax band.

Reeves has snookered that plan, but I'm wondering if continuing to pay into the SIPP is worth it. 

These are my calculations. I'm hoping someone more competent than me can please check them. They apply to 1 year of contributions and post death withdrawals as income.

My cashflow outside SIPP: Pay in £2880. Withdraw 25% of gross £900. Get £720 extra tax relief. My balance = £1260.

Inside SIPP. £2880 from me. £720 from HMRC. £900 withdrawn. Balance = £2700.

After death. 40% IHT leaves £1620. Assuming 20% tax paid by my daughter (very likely), that's equivalent to £1296.

Correct or not?

Cheers.

QrizB

You should also be getting an additional 20% tax relief on your 40% taxed income, up to £3600/yr, based on your £3600 gross SaiPP contribution.

Do you already file self assessment tax returns?

Dazed_and_C0nfused

mrj999 said:

Some years ago, after retirement, I set up a SIPP purely for inheritance tax purposes. I have no non-pension income, so I'm limited to £2880 net payment (£3600 gross). I've been 'fiscally dragged' into the 40% tax band.

Reeves has snookered that plan, but I'm wondering if continuing to pay into the SIPP is worth it. 

These are my calculations. I'm hoping someone more competent than me can please check them. They apply to 1 year of contributions and post death withdrawals as income.

My cashflow outside SIPP: Pay in £2880. Withdraw 25% of gross £900. Get £720 extra tax relief. My balance = £1260.

Inside SIPP. £2880 from me. £720 from HMRC. £900 withdrawn. Balance = £2700.

After death. 40% IHT leaves £1620. Assuming 20% tax paid by my daughter (very likely), that's equivalent to £1296.

Correct or not?

Cheers.

What about the higher rate relief you are seemingly due?

How much into the higher rate band are you?

Linton

The rules for how inherited pension pots will be taxed have not yet been published.  So it is impossible to say definitively whether you are correct or not.  However given the purpose of the change to IHT on pensions is to discourage the use of pensions for tax avoidance rather than saving for retirement you could be correct - the maths looks right. 

Will your estate be liable for inheritance tax anyway?

Exodi

You may have already implemented this or considered it (and if so, my apologies) but with people living longer it's becoming increasingly common that beneficiaries are receiving large windfall inheritances at times in their life that they don't really need them.

The average life expectancy in the UK is about 82. You mention you're some years into retirement, so let's assume you are 70, and looking at average child-bearing ages, assume your daughter may be about 45.

The most expensive years for people often cluster around their 30's, where they will have children, want to buy a house, pay for a wedding, etc.

By contrast the least expensive years for people (excluding childhood!) will be once they might be at the top of their career, paid off mortgage, kids have moved out, etc - say 60.

Yet we commonly find that instead of gifting money to people when they need it most (in their 30s), it is commonly left until people need it least (in their 60s via inheritance). Unfortunately if we go by averages, it appears you may fit this stereotype of mine.

Personally I think it would be infinitely more valuable to provide any gifts as early as possible, when it will make the biggest impact, so they don't have to spend their thirties or forties struggling to make ends meet.

If you are laser focused on tax efficiency (as you appear to be), it is also within your interests to gift the money early, as it would fall outside of your estate (assuming you lift 7 years after the gift) and even if you were pessimistic in the regard, it would make sense to at least make use of the annual exemption.

mrj999

Dazed and Confused/Grizb - yes, I am in the higher rate, whether or not I continue the SIPP. As the calculations show, I am already claiming the extra tax relief to 40%.
Linton - yes I'm divorced and well into the IHT band.
Exodi - Good advice...I have already started doing it. My grandkids all have JISAs and JSIPPs from birth.....gifts out of income. I started gifting cash to my kids a couple of years ago as gifts out of capital. Thankfully, my 2 boys don't mind investing it, so it builds up enough to pay IHT. My daughter is lower paid, single parent and on UC, so I've started gradually paying off her mortgage. I'm 71, they are all early 40s. I have a limit in mind to get down to...enough left to cover potential case home fees.

Albermarle

As said the rules on IHT and pensions are not fixed in stone, but it would seem that if you are liable for IHT, your executor may have some discretion as to where the IHT bill is paid from . So either the pension or the rest of the estate, or a mixture of both.
For sure just because you will be liable to pay some IHT, it does not mean your whole pension pot will automatically be charged 40% tax. 

Marcon

mrj999 said:

I'm 71, they are all early 40s. I have a limit in mind to get down to...enough left to cover potential case home fees.

So you'll only be able to do if for another 4 years, given that you won't get tax relief once you hit 75.

Maybe contribute your £2,880 each tax year, claim the higher rate relief, then take it out as soon as the tax relief for the year has been added (OK, 75% is taxable at higher rate, but you're still ahead) and have a really good family outing...?