IHT mitigations (Inheritance Tax)

Yellowkite

The tax system is used by policymakers to encourage people to save into pensions to pay for their retirement……..

…….of course agree with that. Governments recognise the future state pension costs issues, and hence encourage individual pension saving, but 1 of the most obvious inducements was that you could pass your fund to beneficiaries. (Your estate was typically your house and other things up to £1m etc. before IHT). The recent radical change for 2027 (adding pensions to estates) is getting people thinking. And IHT now seems to be a political game of ping pong. So probably anything could happen in the next 5 years.

 bypassing one generation ……..

……possibly if that happens

Charity donations, ……

…….definitely worth considering

So many of the comments are about how your mindset can be adjusted to account for all the rules, and that’s quite interesting

Dead_keen

So many of the comments are about how your mindset can be adjusted to account for all the rules, and that’s quite interesting.

I think a lot of people have been slow adjusting their mindset because of one or more of:

1. They might not actually impacted by the change (e.g. not likely to pay IHT).
2. Not able to take meaningful action (e.g. their assets do not exceed their desired lifestyle).
3. There is a can, so kick it - we are not yet in April 2027 and there is always the possibility that the rules will change back again.
4. There are too many choices as to what to do.
5. There is too much uncertainty as to how long you will live and whether you or your partner will end up in a care home.
6. There is too much noise as to what to do (e.g. some people say that a guaranteed annuity is a way to get around these rules if you die early - which is not true, someone asks about a limited partnership, and so on).
7. It takes courage to give assets away when you might need them later.
8. People don't like paying tax now, even if it might save more tax later.
9. They don't trust their kids.

Some of that's a good thing - I don't want people to take action everytime some lobbyist gets an article in a newspaper. But when it is a government annoucement, followed by legislation, that delay seems strange.

I will admit it took me a while to get my mind in gear as to my full plan, and I still second guess change myself every now and then about what is the right thing to do, and I think I properly understand the pension IHT changes. Despite that, I took my first action on these changes in the afternoon of the Budget that announced that announced them. I think the biggest issue for my mindset is whether I am confident enough that I will live to age 75 or not. I'm sure I will (and the stats agree with me) but voluntarily taking money out of a pension to pay income tax now, and which might be tax-free if I die before age 75, is something that still makes me think.

Aretnap

Governments recognise the future state pension costs issues, and hence encourage individual pension saving, but 1 of the most obvious inducements was that you could pass your fund to beneficiaries. (Your estate was typically your house and other things up to £1m etc. before IHT). The recent radical change for 2027 

It's not really a radical change. Pensions have only been a viable option for passing on funds to beneficiaries for the blink of an eye, in the context of a working life. Until 2015 buying an annuity was compulsory, which meant that for most people there was nothing to pass on at all when they died, and if you had the misfortune to die before you'd bought your annuity, unused funds in your pension were subject to a blanket 55% tax charge, with no million pound (or any) tax exempt threshold.

So the new rules mean that it is still considerably easier to pass on your pension fund to beneficiaries that it was under the original system. However the tax incentives now only apply to money you actually need for your own retirement rather than providing a massive tax free wodge to hand on to your children.

Aretnap

https://forums.moneysavingexpert.com/discussion/comment/82179208#Comment_82179208

As mentioned already it's unlikely that anything like the full pot will be subject to 40% IHT, and if it is that will be because the rest of your legacy will be very large… which falls firmly into the category of nice problems to have. Not sure why the prospect of inheriting a very large amount of money but having to pay some tax on it is such a bad one - it certainly beats not inheriting a very large amount of money.

If your beneficiary is very bad with money then one risk that you might actually be able to do something about is the risk that she'll withdraw too much too quickly from the pension and end up paying much more tha 20% tax on it - you can help prevent that to an extent by making sure that she understands the tax implications of doing that. Though ultimately if you leave someone money you are accepting the risk that they will spend it unwisely - she has the right to make her own decisions with it, including decisions that you or I might see as bad ones.

ljayljay

https://forums.moneysavingexpert.com/discussion/comment/82179614#Comment_82179614

Agree, I don't see why this would be considered radical. Surprised it wasn't treated this way at the outset. Basically, just brings it into alignment with other assets for IHT. I have a SIPP (admittedly not large) but accept that any leftovers will be included in my estate.

LHW99

5. There is too much uncertainty as to how long you will live and whether you or your partner will end up in a care home.

I think this is a significant part of it for those whose total estate is between £1m and £2m. Less than 1m, probably not enough for any long term payment of fees, so can't be planned for and over £2m, probably enough to pay in most circumstances.

Until 2015 buying an annuity was compulsory, which meant that for most people there was nothing to pass on at all when they died

But until 2015, autoenrollment wasn't a thing, so the number of people with a DC pension was smaller. When people feel "forced" (wrongly) to be enrolled in a pension, it's likely to raise the idea of "that's my money I should be able to pass it to my kids without the Government taxing it" - unreasonable, but probably human nature.

silvercar

What we’ve thought of so far (we are early 60s).

When the time comes, we will do a DoV on inheritance from our parents, so the money passes straight to our kids (30s).

Sell our holiday home in the next few years (its underused in any case) and gift the proceeds to the kids.

Gifts out of surplus income - we have a monthly standing order to grandkid, we also give an annual gift to each of the kids of variable amounts.

Potential gift out of income or PET, we helped both kids with first home deposits. They came out of excess income because OH had big bonuses in both those years; tied together with the annual gifts, I would hope that they would be accepted as gifts out of income, alternatively they could be PETs, which would require less justification.

Marcon

But until 2015, autoenrollment wasn't a thing, so the number of people with a DC pension was smaller. When people feel "forced" (wrongly) to be enrolled in a pension, it's likely to raise the idea of "that's my money I should be able to pass it to my kids without the Government taxing it" - unreasonable, but probably human nature.

Auto-enrolment didn't coincide with the so-called 'pension freedoms'. It started to be phased in from 2012, so DC pensions started to mushroom from then - albeit it was done by size of employer and many of the employers who were amongst the first to be subject to the 'employer duties' of auto-enrolment were public sector organisations with DB schemes.

People are forced to be enrolled in a pension if they are eligible jobholders, but always have the option to opt out.

I've always been a bit baffled by anyone who has the attitude you describe (completely agree with you, by the way) - I've never understood why DC pensions are seen as 'their money' but, unlike other investments and savings they hold, shouldn't be taxed. It was always an oddity that DC pensions had a period of being outside the IHT regime, but given the outcry when it was announced that situation is going to change, you can see why politicians had previously steered clear.

I think the biggest issue for my mindset is whether I am confident enough that I will live to age 75 or not. I'm sure I will (and the stats agree with me) but voluntarily taking money out of a pension to pay income tax now, and which might be tax-free if I die before age 75, is something that still makes me think.

You are far from alone - but the change does at least bring back into sharp focus the purpose of pensions: to support you (and possibly a partner) in your old age.

MallyGirl

This age 75 feature is causing most thought at the moment. My pot is smaller than my husband's and will not support drawdown of £50k (or whatever the 20% threshold is by then) for my ONS predicted lifetime. I had planned to do it anyway, putting unspent excess into ISAs. If I die before 75 I would have paid tax unnecessarily. I may start a bit slower and ramp up once spending is clearer.
Oh for a crystal ball - but then would I really want to know?

No idea how to turn off this funny format !

Yellowkite

Pensions are often a very touchy subject within the nation, and a political hot potato, and all changes usually cause some sort of outcry. There’s been a few recently like pension age increases, triple lock etc.

I think it’s a kind off a “social contract” issue. So people will say something like “I paid into the system, so I should get the same pension”, even although it doesn’t work like that. In a similar vein they might think……I’ve made all my plans on the basis I was “promised”, and now you are changing all the rules.

Everyone is in their own boat financially, so to speak, and hence will have their own view on changes.

But there’s no choice but to get on and manage best we can within the rules.