Taking extra pension to allow gifting from income

RetiredandHappy

I am 74. I have DB pensions that together with the State pension total about 42k. I also have a SIPP which I have taken the 25% tax free cash from already. I am debating taking a monthly, large amount from the SIPP (as income) to allow me to gift it to my children as gifts from excess income - so free of IHT. The main objective is to reduce the SIPP's value so that it will attract less IHT when I die. Assuming a continuing reasonable return on the SIPP investments, I need to take maybe 50k from it each year to pull it down. So a lot of that will be at 40% tax though not all.

So my quandary is - do I pay nearly 40% tax now for certain (and please Rachel) but probably avoid 40% tax later together with 20% or 40% income tax that my children would need to pay on withdrawal, or do keep the SIPP as it is and hope a future government will remove IHT? My guess is that that is a forlorn hope but what do others think?

Also, have I ignored something within this calculation that I should know about?

Albermarle

Will you definitely be liable for IHT? If you are married and the kids get the house ,your nil rate band will be a Million quid.

Any unused amount in the SIPP, will be included in your estate for the IHT calculation, but that does not automatically mean it will be subject to IHT. If it is then it will normally only be on a part of the pot, not all of it.

do I pay nearly 40% tax now for certain (and please Rachel) but probably avoid 40% tax later together with 20% or 40% income tax that my children would need to pay on withdrawal, 

AFAIK- The exact detail of the rules that will be applied are not fully known yet, so maybe best to wait.

and hope a future government will remove IHT? My guess is that that is a forlorn hope but what do others think?

Seems pretty unlikely but the limits might be changed at some point I guess. More likely the 'gifting from income' loophole will get stopped.

Brie

Are you sure you won't need the money in the SIPP to pay care costs in a decade or whenever? I think it's marvellous to want to provide your children with an inheritance or money now but it shouldn't be to your own detriment.

BikingBud

There seems to be a negative consensus about gifting from excess income almost to the point of trying to deter people from considering it.

What is the realistic likelihood of going into care?

What are the likely costs?

If people have clear ownership of a property does that cover the potential costs of care?

HPI has seen estates grow at crazy rates and static IHT limits are being breached with relatively modest other assets.

Yes there are some burdens to establishing records and patterns but are they really any more onerous than other inheritance planning?

In terms of effort and benefit I would suggest it is more beneficial than tying to preserve everything into a complex and poorly understood trust fund with additional ongoing professional fee liabilities.

If/when I'm chewing porridge what will I know or care?

To me it is a relatively simple question: Is gifting from excess and sharing in the enjoyment of the benefits that your gift worthwhile?

To me yes.

Albermarle

In terms of effort and benefit I would suggest it is more beneficial than tying to preserve everything into a complex and poorly understood trust fund with additional ongoing professional fee liabilities.

That is very true.

Dead_keen

The only way to be numerically certain is to know the future. So leaving that flippant comment aside, my thinking is: yes, provided:

1. You expect to have enough to live on after the gifts.
2. You don't dislike your kids.
3. Your estate is likely to have to pay IHT after you (or your spouse) dies.
4. You expect to die after age 75 (after which money from the inherited SIPP will be taxed on the kids at income tax rates).

Will the April 2027 IHT on pensions change be changed back? Not a chance.

Will IHT itself be changed to mean that your estate pays less IHT when you (or your spouse) dies? Perhaps (e.g. by raising thresholds before you die so that your estate won't pay IHT).

In my view, paying 40% income tax now to save 40% IHT later makes sense. If your estate is in the 60% marginal IHT rate position, even better.

BikingBud

https://forums.moneysavingexpert.com/discussion/comment/82039242#Comment_82039242

Sorry to be picky but surely the modelling is to pre-empt, inform and support a decision that is most suitable.

A retrospective will tell you what you did but the outcome should be clear and perhaps only inform that your decision lead to irrecoverable losses.

BikingBud

https://forums.moneysavingexpert.com/discussion/comment/82040661#Comment_82040661

The point i was trying to make - you cannot decide retrospectively.

Yes absolutely build your model to inform the decision but not to analyse what you have done.

It is a done deal!

BikingBud

Sorry to insult but you do understand that retrospectively means looking back after the events have occurred. You stated:

In my experience, the process of creating a model can assist in clarifying thinking as well as inform decision-making.

Hence my point that you cannot build a model to clarify and support a decision you have already made.

But hey its a Friday night and I am sure you are sure about what you meant.

MarzipanCrumble

Gifts out of excess income can be ceased if circumstances change, i.e. going into care. Make sure the kids know this! Remember to keep accurate records: drawing down 50k p.a. - will HMRC look on that with sceptism? (sp)

I gift out of excess income. I keep annual records based on IHT403. If 'nothing changes' re RReeves decree on SIPPs being drawn into IHT 2027 then I will crystalise it, gift a good part of the tax free sum, then pay into a SIPP for each of the kids. (I think.) BUT ——— guess what - the King of the North aka as Andy may abolish IHT for a flat 10% tax on all estates (please, please, pretty please). So any plans may need to be put on hold or tailored for imminent change…….