Gifting out of excess income re dc pension

Crudecheese

I understand how to work out ‘excess income’ from a db pension, I guess if you are left with surplus money every month it’s quite simple and understand the rules about regular payments and keeping documentation but how do you work out ‘excess income’ when you basically have just a dc pot. Including State Pension I only drawdown to keep me as a 20% tax payer and I don’t spend all of it. My pot and other savings should be large enough to see me out. I buy everything I need/want and enjoy my lifestyle but think there will be a surplus at the end.

Can anyone give any tips on how I should work the numbers out,

thank you

ader42

I guess you keep your taxable pension income stable enough that you don’t need sudden big purchases?

My plan is as yours, keep within the 20% tax bracket and setup direct debits into kids SIPP/LISA. The 20% bracket is far more than I need given the TF 25% was used to pay off the mortgage.

I guess the paranoid would buy an annuity but there’s no chance I’ll be doing that.

TadleyBaggie

I'm drawing (at age 72) from my SIPP just enough to keep me below the higher tax band, I have a Final Salary pension and a State Pension slightly above the normal max. The issue is every year I have to reduce my drawdown and it a few years this will I just have to bite the bullet and starting paying extra tax. My SIPP was roughly £225K 3 years ago, and currently sitting at around £272K.

BikingBud

Unless I have misinterpreted drawdown is not consider income. You may wish to search as there have been a few posts querying this recently.

See here:

ader42

I have seen many financial advisors state that Drawdown and UFLPS are considered income for this.

Keep_pedalling

Is your estate actually in IHT territory? Are you married to the partner you mentioned in an earlier thread?

Marcon

I thought this was particularly helpful reading: https://techzone.aberdeenadviser.com/public/iht-est-plan/gifts-out-of-surplus-income

tacpot12

https://forums.moneysavingexpert.com/discussion/comment/81898002#Comment_81898002

I agreethat it is useful information, but there is a problem with it.

The most relevant information is that income from DC pensions is limited to the the natural yield from investments such as interest or dividends and rental income. This is probably the most significant hurdle for anyone who has taken the approach with their DC pension that they will invest in growth funds only, and will sell assets to generate income. However, this assertion that income is limited to the natural yield is at odds with the assertion that pesion tax-free cash can be included in income, as this is capital so the advice is somewhat contradictory.

My approach is only to regard the natural yield as income, and foregoe the IHT benefit of being able to count all the withdrawals from my DC pensions as income.

kermchem

If you pay income tax on withdrawing from a DC pension then how can HMRC not consider it income?

ader42

https://forums.moneysavingexpert.com/discussion/comment/81898198#Comment_81898198

I think you have read this very, very wrongly.

It says:

“What is included as income?

It is broadly income received after tax from employment or pension, the natural yield from investments such as interest or dividends and rental income. ”

i.e. one of the following three options:

1. “income received after tax from employment or pensions,”
2. “the natural yield from investments such as interest”
3. “or dividends and rental income”

It does not say that income received after tax from employment or pension has to be natural yield from investments…

1 is what we are discussing; post-tax income from a pension

2 is income from a persons general investment accounts and ISAs

3 is income from a Ltd. Co. business or landlord rental income (BTLS)

All 3 of these are considered appropriate income.

2hc9kmju

https://forums.moneysavingexpert.com/discussion/6656749/gifting-out-of-excess-income-re-dc-pension

Hi Crudecheese,

This is a very technical and subjective (from the HMRC's perspective).

The only real way to be certain that you shouldn't trigger any of the IHT impacts regarding gifting from surplus income would be to seek professional advice.

You could write to HMRC and ask for a ruling, but in my experience (I'm a Chartered Accountant), if you sent them 3 identical letters, you're likely to get four conflicting responses 😀.

You could see if Citizen's Advice provides anything on this or Which may have some guidance that explains it in more detail.

But ultimately, this is a complex and not widely understood area of Inheritance Tax and so a professional advisor is likely to be the best way to get a definitive view.

As for selecting one, I'd suggest you see about meeting two or three local advisors and explain what you are looking for and from that initial discussion assess how you feel about each one - whether you are confident they know what they are doing and can explain it to you in a way that you understand, that they are happy to address any questions or concerns you raise again with clear expklanations and ultimately that you "like" the person and would be comfortable with them working on this for you.

This would be a fairly straightforward advisory service for an experienced IHT practitioner (something I am not, unfortunately) and shouldn't cost too much (ask for details of their fee up front and whether they could do it fixed price).

Hope this helps and good luck.

If you are feeling magnanimous, you could post a summary of the outcome to the forum.

Regards,