Which would you do?

Madeinireland · 15 June 2019 at 9:29PM

I have some AVC’s (£224k) that are associated with my DB pension.

I am considering giving up the tax free extraction benefits of the association in order to get to a more flexible position and to provide a pension pot that could be inherited outside my estate.

Basically the choices are...

1. Take £146k tax free (due to the association with my DB pension) and the remainder must buy an annuity £78k and be lost to me forever.

2. Transfer the whole AVC out to a SIPP and extract £56k out tax free. This leaves a taxable SIPP of £168k which is effectively outside my estate, can be invested and can be used if needed or passed on to my kids.

Which option would you take in my position? Am I mad to miss out on the tax free cash? Can you think of a better approach?

I have no need for the tax free cash as I will have about £100k from my DB pension and the £56k from the SIPP and all the money would increase my current inheritance issue. I think I have calculated that I am in effect giving up £18k in potential tax savings although if I were to die before 75 it would pass on free of tax anyway to my wife.

Thanks...

SeniorSam · 16 June 2019 at 6:49AM

Transfer to a Sipp, but why take the tax free cash straight away, unless you need to spend it. Leaving it in the Sipp account, (Crystalised) it would all be available tax free to your nominated beneficiaries when you die. It's only when you start drawing from that and move it all or part of it into an Uncrystalised account, that you can cash it in and take 25% tax free of the amount taken out.

Prior to retirement, I moved 5 pensions to a Sipp, but didn't start taking anything from it for several years after I stopped work at 70. I had also deferred my State pension for 4 years and had a good increase in that. State now pays me £16,375 and with another small pension and my wife's State pension, I am only drawing on my Sipp in an add-hoc way of £10-20k per year.

Do your homework and you may find that you can do far better than you thought. My Sipp is now £200k up on what it was in 2012 and I have taken £70k already. Good fund investment has worked well.

jamesd · 16 June 2019 at 7:06AM

From your previous posts it appears that you will have ample guaranteed income. This means that there is little for you to gain by spending £78k on say a level annuity.

What I'd probably do is transfer and use VCT buying to effectively eliminate the tax loss. And couple that with gifts while alive to manage the inheritance tax issue.

Apodemus · 16 June 2019 at 8:27AM

SeniorSam wrote: »

Transfer to a Sipp, but why take the tax free cash straight away, unless you need to spend it. Leaving it in the Sipp account, (Crystalised) it would all be available tax free to your nominated beneficiaries when you die.

Have I got this wrong...? Assuming IHT threshold has already been reached by other assets, £100k additional cash would be taxed at 40% IHT on passing to beneficiaries. £100k remaining in a SIPP will pass out of the estate tax-free, but add to the beneficiaries’ income for income tax purposes in the year that probate is granted. So depending on number of off-spring, that could be £100k, £50k, £33k etc additional income. Unless these individuals are earning below the national average, they will all pay at least 40% on some of the inheritance. So If they earn above the basic-rate threshold, the tax-take will be the same or more than the IHT avoided? This is sounding less of a bargain!

SeniorSam · 16 June 2019 at 8:37AM

Whe the Sipp passes to the beneficiaries, they can maintain the Sipp in the Trust and operate drawdown if they wish. They do not have to take the cash and add it to their estate. If the IHT threashold has been exceeded (£325,000 each) plus Residential allowance of £175k each, then it may be beneficial to cosider more gifting, either directly, with the 7 year rule to consider, or insurance od the IHT liability, which could be far cheaper than you expect with only 40% of the gift to cover. Other avenues such as Gift & Loan Trusts may also be helpful. A good IFA who has Trust knowledge may also be worth consulting.

Madeinireland · 16 June 2019 at 10:38AM

Hi Seniorsam - I was aiming to take the tax free amount from the SIPP as I would be very very close to the LTA limit so wanted to crystallise it and manage any excesses before 75 by way of drawdown. I was preferring this as opposed to the possibility of the SIPP growing before I crystallise such that I would then be in LTA land for sure. I’m already probably going to have to use the small pots rule to escape LTA tax without even factoring growth.

Hi James - Yes I do intend to manage my inheritance issues by gifting while still alive and almost all of the additional DB pension lump sum will be going to them. Both kids are unlikely to be 40% tax payers anytime soon if ever.

I’m definitely coming down on the side of transferring to the SIPP and losing some of the tax free benefits. I’m pleasantly surprised everyone so far seems to be in agreement - I was half expecting some to think I’m mad to take that approach.

Which would you do?

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