Pension Beneficiaries - IHT Changes

Hal17

I am 72 and currently have my wife, two children and 2 grandchildren as beneficiaries on my Royal London DC pension. I have made a note in my calendar for the 5th April 2027 to change this back to 100% for my wife.

My understanding is that with the new IHT changes, the children and grandchildren would have to pay IHT on their share of my pension should I pass. I know that if you die before 75, the pension can be taken tax free. However, I want to make sure that my understanding of the new IHT rules and pension beneficiaries is correct? Many thanks.

Keep_pedalling

Your estate pays any IHT liability not your beneficiaries. Is your wife the mother of your children? If she is I can’t see any point in splitting your pension distribution the way you have done and would change it now.

Hal17

Thank you for the input. Yes my wife is the mother of the two children.

The reason I split the pension fund was because with other investments and savings it seemed a good way to pass on money to the other family members tax free should I die before 75. My wife would still have significant funds available with the current pension split.

With the IHT changes on April 2027, the only way for the estate to avoid IHT is to make my wife the sole beneficiary on the DC pension. However before that date I still have the opportunity to pass money to my children tax free should I pass before April 2027. So I am not sure what benefits I would get if I changed it now. Thanks again.

LHW99

Are you in poor health now? if not, why change it until you are (approaching) 75 in 2029?

dunstonh

https://forums.moneysavingexpert.com/discussion/6682541/pension-beneficiaries-iht-changes

There appears to be some confusion there.

IHT only applies if the estate is above the IHT allowances. Pensions will be included in the value of the estate. If the value of the estate is below the thresholds, then no IHT will be payable.

If the value of the estate is above the threshold, then the amount above the threshold will pay IHT and that will be split pro rata between the assets of the estate and the pension.

There is no IHT between husband and wife, however, you need to take into account what happens on second death.

The age 75 rule is completely unlinked to IHT. If you die before 75, there can still be IHT payable. It's just that there will be no income tax for the beneficiaries. If you die after 75, again, still subject to IHT, potentially, and the beneficiaries are also subject to income tax if and when they take an income from it.

Passing the pension to the children if you die before 75 would seem more tax efficient than passing it to your wife who, when she passes away, would then pass it to the children and grandchildren. She would need to be under 75 at the time for the tax-free status to be maintained.If she dies after 75, then it becomes taxable.

With the IHT changes on April 2027, the only way for the estate to avoid IHT is to make my wife the sole beneficiary on the DC pension.

The risk of that is it just delays the inevitable. I.e., it becomes payable on second death.

However before that date I still have the opportunity to pass money to my children tax free 

just to reclarify, it is free of income tax. It will still be included in the value of the estate for IHT purposes once that legislation becomes effective.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82129412#Comment_82129412

If the value of the estate is above the threshold, then the amount above the threshold will pay IHT and that will be split pro rata between the assets of the estate and the pension.

I said something similar in a post a couple of weeks ago, but @SnowMan stated that it would be possible to pay all IHT due from the estate, and none from the pension ( so not pro rata) . However not possible to do it the other way around.

There also seems to be still a lot of confusion about liability for income tax after IHT is paid from a pension pot.

Heirs' income tax on inherited SIPPs — MoneySavingExpert Forum

Hopefully when Executors guidelines are published in lay language ( I think that is the plan) it will be clear then.

coyrls

If the wife as sole beneficiary gifts excess funds to the children on the husband's death, IHT that would have been paid if the husband had named the children as beneficiaries can be avoided if the wife lives for seven years after the husband's death.

kermchem

https://forums.moneysavingexpert.com/discussion/comment/82129628#Comment_82129628

Yes, but as the original question is about a DC pension, it is not clear how the widow on husband's death can gift excess pension funds to the children. Yes, other funds can be gifted, but if there is a process by which pension funds can be gifted by a living donor then please tell us.

coyrls

https://forums.moneysavingexpert.com/discussion/comment/82129648#Comment_82129648

If the husband dies before 75, the money can be taken from the pension tax free and gifted to the children. Otherwise the gifts would need to be from alternative funds (which would probably be available if the estate is liable for IHT) or from taxed pension withdrawals.

Triumph13

Leaving it all to the wife also leaves open the option, if husband dies after 75, of wife then using it to fund gifts from income and avoiding the double whammy of IT and IHT that way.

Hal17

Thank you all for the replies, I really do appreciate that. It has certainly given me something to think about.

I would be above the IHT allowances if I were to pass away. So anything over £1M (for a couple), would be liable for IHT on the death of the second person. The idea in changing the beneficiaries was to help remove some funds from the estate, in order to reduce the value if anything was to happen before April 2027.

In April I would then change the beneficiary back to my wife to 100% of the DC fund value. I appreciate we would still have a IHT liability going forward, hence our on-going plans to actually spend more and gift more to our family. Thanks again.