Another SIPP inheritance topic

[micrographia]

Currently in a fairly comfortable financial position with an intention of retiring in 7 years (if I'm able) or 12 years (when I'm kicked out). Excellent workplace pension in place, substantial AVCs being made, a chunk of ISA sheltered investments that should all provide for a decent retirement. Married, 2 dependant kids.

I was intending to open a SIPP shortly before retirement, with the intention of filling it with the modest sum you are allowed to contribute without earnings once I did, as one of the ways to limit any eventual IHT hit. Invested in a global tracker or the like. Wouldn't be touched by us for income unless something unforeseen happens and it would only ever be a modest sum anyway (though women in my wife's family are famously long-lived, so who knows ).

However, my wife and I both have elderly parents with health issues. We never considered receiving inheritances when planning our own finances so frankly don't need them. Parents would be pleased to know any money they left to us was being directed at their grandkids. We'd set some of this aside for help when they are younger but would obviously like to know that they and any families they might have would get some extra financial security when we finally shuffle off ourselves.

So in a nutshell - is it worth my wife and I opening SIPPs now, while we are still employed, with a nominal monthly contribution, just so that if our parents pass away before we retire we are able to shift a worthwhile portion of any inheritance into it? Still lots of headroom in our annual allowance. If they don't, then as far as I can see we get a small head start on our IHT plan anyway. Can't see any obvious reason not to, we'd basically just be burning the monthly management fee and I spend more on coffee at work than that.

Thanks in advance for any advice, EEM.

[Urbandreamer]

So in a nutshell - is it worth my wife and I opening SIPPs now, while we are still employed, with a nominal monthly contribution, just so that if our parents pass away before we retire we are able to shift a worthwhile portion of any inheritance into it? Still lots of headroom in our annual allowance. If they don't, then as far as I can see we get a small head start on our IHT plan anyway. Can't see any obvious reason not to, we'd basically just be burning the monthly management fee and I spend more on coffee at work than that.

Thanks in advance for any advice, EEM.

Hell yes. Depending upon what your salary is, any allowance that you don't use is lost.
Sure you can use "unused" allowances from the previous few (three I think) years, but your contribution limit is your salary.
I am of course assuming that you have enough outside a pension to cover emergencies etc.

I'm currently spending my ISA rather than taking my pension, to reduce IHT. Had I thought about it early enough I would have moved more of my ISA into my SIPP, but the concept only occurred to me a couple of years before giving up work.

[Lootman]

I'm currently spending my ISA rather than taking my pension, to reduce IHT. Had I thought about it early enough I would have moved more of my ISA into my SIPP, but the concept only occurred to me a couple of years before giving up work.

The flip side of that is if you decide to retire overseas. The ISA can be liquidated tax-free and in full at any time, and the funds expatriated. But a UK pension is a UK asset forever, and therefore potentially subject to the risk of adverse future legislation.

And IHT is likely to be much less of a problem, in practice, if you had cut all ties with the UK long ago.

[DrFfybes]

Is it worth sheltering surplus assets?

Definately.

Will the IHT exemption for SIPPs exist when you pop your clogs in 30 or 40 years?

Who knows, it will probably have been abolished and reintroduced several times by then

Another option is you don't say how old your dependant children are, but you could put into JISAs or JSIPPs for them, or perhaps get the grandparents to do it (if they have surplus income, or using their annual allowances) thus bypassing you entirely as far as IHT is concerned.

I got a 'much larger than expected' inheritance after mum had a stroke 3 months into her care home tenure. I'm not working, MrsF is part time, it will take us a long while to shelter it all. As said, use it or lose it.

Paul

[SebsCat]

If you die after 75, any money your kids take from the inherited SIPP will be taxed at their marginal rate. This could be higher than the IHT rate. Something to think on.

If the intention is for any inheritance you get to be passed on to your children then I would explore ways for your parents to leave it directly to them along with any necessary safeguards to stop them blowing it at a young age.

[mc2fool]

... a UK pension is a UK asset forever ...

Not necessarily so. https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/moving-your-uk-pension-overseas

[Arborbridge]

If you die after 75, any money your kids take from the inherited SIPP will be taxed at their marginal rate. This could be higher than the IHT rate. Something to think on.

If the intention is for any inheritance you get to be passed on to your children then I would explore ways for your parents to leave it directly to them along with any necessary safeguards to stop them blowing it at a young age.

If they use the SIPP as a pension when they retire, their marginal rate on income drawn has a sporting chance of being low - depending whether they've invested much for themselves.

All our SIPPs are taxed at marginal rate, so that is something we just live with by drawing sensible amounts and leaving the rest to the next generation. No different when it comes to the kids' turn.

Arb.

[micrographia]

Many thanks all, much as I thought then. I'll use the sweepings of the current account to open a SIPP with my ISA provider at the end of the month then set up the minimum acceptable monthly contribution and a regular purchase order for something fire and forget like one of the Vanguard Lifestyle funds.

Yes, it would be better for the grandparents to be gifting money directly to their grandkids now, but for various reasons we decided long ago that we'd rather they make the most of any cash themselves and we'd do our best to pass any remainder on.

EEM

[Lootman]

... a UK pension is a UK asset forever ...

Not necessarily so. https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/moving-your-uk-pension-overseas

"On transfer, your QROPS will have a ten-year reporting requirement to HMRC. So if you breach the rules of a QROPS, such as taking money from the pension before the age of 55, you could still have to pay a tax charge of 55% plus penalties."

Not really what I had in mind

[mc2fool]

Not necessarily so. https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/moving-your-uk-pension-overseas

"On transfer, your QROPS will have a ten-year reporting requirement to HMRC. So if you breach the rules of a QROPS, such as taking money from the pension before the age of 55, you could still have to pay a tax charge of 55% plus penalties."

Not really what I had in mind

Yes, but if you leave your SIPP in the UK you can't take any money from it at all before the age of 55 (rising to 57 in 2028). But the core point is that a SIPP is not a UK asset forever and can be transferred overseas, notwithstanding some restrictions for the first ten years.

However, it doesn't look like that'd affect the OP as it sounds like they're already at or close to their mid 50s, and haven't said anything about moving abroad anyway.

[Lootman]

"On transfer, your QROPS will have a ten-year reporting requirement to HMRC. So if you breach the rules of a QROPS, such as taking money from the pension before the age of 55, you could still have to pay a tax charge of 55% plus penalties."

Not really what I had in mind

Yes, but if you leave your SIPP in the UK you can't take any money from it at all before the age of 55 (rising to 57 in 2028). But the core point is that a SIPP is not a UK asset forever and can be transferred overseas, notwithstanding some restrictions for the first ten years.

I was simply drawing a contrast between as ISA, which can be closed at any point without notice, taxes or limits, and the money instantly exported. And a pension where there are a whole slew of rules, restrictions and taxes if you wish to withdraw or export all its value and escape UK influence.

Historically to me it has always seemed worth something that an ISA is much more flexible in that way. And that is part of why I do not have a SIPP (although I do have a couple of deferred occupational pension plans).

[Dod101]

Is it worth sheltering surplus assets?

Definately.

Will the IHT exemption for SIPPs exist when you pop your clogs in 30 or 40 years?

Who knows, it will probably have been abolished and reintroduced several times by then

Another option is you don't say how old your dependant children are, but you could put into JISAs or JSIPPs for them, or perhaps get the grandparents to do it (if they have surplus income, or using their annual allowances) thus bypassing you entirely as far as IHT is concerned.

I got a 'much larger than expected' inheritance after mum had a stroke 3 months into her care home tenure. I'm not working, MrsF is part time, it will take us a long while to shelter it all. As said, use it or lose it.

Paul

Strictly speaking there is no IHT exemption for a SIPP. Most are not and never have been part of your estate. We must not forget that they are first and foremost a pension asset and under the pension rules, the assets are held by trustees. In the old days, a pension died with the pensioner unless the benefits had been extended under the rules to provide a pension for a surviving widow, then the pension died. Having personalised the assets backing the pension with a SIPP, the question was I suppose, what to do with these when the pensioner died. They are seen as personal assets and so the powers that be decided that the SIPP could be passed on at death and since they have never been part of the deceased's estate they are passed on free of IHT. That is surely though a secondary consideration for most people.

Dod

[Lootman]

Strictly speaking there is no IHT exemption for a SIPP. Most are not and never have been part of your estate. We must not forget that they are first and foremost a pension asset and under the pension rules, the assets are held by trustees. In the old days, a pension died with the pensioner unless the benefits had been extended under the rules to provide a pension for a surviving widow, then the pension died. Having personalised the assets backing the pension with a SIPP, the question was I suppose, what to do with these when the pensioner died. They are seen as personal assets and so the powers that be decided that the SIPP could be passed on at death and since they have never been part of the deceased's estate they are passed on free of IHT. That is surely though a secondary consideration for most people.

Yes and I think that if the government thinks that too many people are padding their SIPPs to avoid IHT then they may slam that door shut in an instant. It is not clear what the rationale is for treating a SIPP any different from an ISA or other pool of investments.

The problem both with IHT planning and pension planning is that you can spend 20 years developing a strategy and then overnight it is rendered useless by yet another change in the rules.

[Arborbridge]

Strictly speaking there is no IHT exemption for a SIPP. Most are not and never have been part of your estate. We must not forget that they are first and foremost a pension asset and under the pension rules, the assets are held by trustees. In the old days, a pension died with the pensioner unless the benefits had been extended under the rules to provide a pension for a surviving widow, then the pension died. Having personalised the assets backing the pension with a SIPP, the question was I suppose, what to do with these when the pensioner died. They are seen as personal assets and so the powers that be decided that the SIPP could be passed on at death and since they have never been part of the deceased's estate they are passed on free of IHT. That is surely though a secondary consideration for most people.

Yes and I think that if the government thinks that too many people are padding their SIPPs to avoid IHT then they may slam that door shut in an instant. It is not clear what the rationale is for treating a SIPP any different from an ISA or other pool of investments.

The problem both with IHT planning and pension planning is that you can spend 20 years developing a strategy and then overnight it is rendered useless by yet another change in the rules.

I fear it could go the way of many tax plays: as soon as a large number of people find out about it, it will cease.
This has been happening all my life.

Arb.

[terminal7]

Yes and I think that if the government thinks that too many people are padding their SIPPs to avoid IHT then they may slam that door shut in an instant. It is not clear what the rationale is for treating a SIPP any different from an ISA or other pool of investments.

The problem both with IHT planning and pension planning is that you can spend 20 years developing a strategy and then overnight it is rendered useless by yet another change in the rules.

I fear it could go the way of many tax plays: as soon as a large number of people find out about it, it will cease.
This has been happening all my life.

Arb.

Indeed and it's even more likely to happen with a change of Govt (not a political point - just pragmatic).

Hence, for those who are fortunate enough to be in this position - just gift large chunks to the offspring and live for 7 years. They can buy somewhere to live and not pay high borrowing charges.

T7

[micrographia]

That is surely though a secondary consideration for most people.

Dod

I'm not so sure you know. A SIPP may be a great option purely on retirement finance grounds for some, but the only real reason for someone with a decent workplace pension to look at one is preservation of multi-generational wealth. If both I and my wife opened a SIPP and only ever fully funded it with £240 p/m out of our state pensions until we were 75, it could grow into a tidy sum if one of us lived long enough. I wonder how many people do this, or are able to. Maybe it will get more attention as the number of people being unexpectedly captured by IHT increases. It's only home ownership making us consider it.

I'd be astonished if the people who originally drew up the SIPP rules weren't very aware that they would be used in this way .

EEM

[micrographia]

I fear it could go the way of many tax plays: as soon as a large number of people find out about it, it will cease.
This has been happening all my life.

Arb.

Indeed and it's even more likely to happen with a change of Govt (not a political point - just pragmatic).

Hence, for those who are fortunate enough to be in this position - just gift large chunks to the offspring and live for 7 years. They can buy somewhere to live and not pay high borrowing charges.

T7

I think concerns are overstated. If opening a SIPP to shelter an inheritance from IHT when you pass away yourself then you'd need to inherit before you retired, have enough spare allowance to salt away a decent amount and be sanguine about not needing the cash yourself. That's a pretty small pool to go after.

Income taken from the SIPP by your descendants would be taxed anyway, so you're also reducing the tax take further down the road if you see it as a loophole that needs to be closed. If you do go for it and a future Govt decides that SIPPs will count towards IHT, you've ended up better off in retirement than you expected. Gift away. If they do so before you retire and inherit and you gift the inheritance straight on to the kids, there's a very good chance you'll live long enough that the Govt will see none of it aside from what they get if your kids spend it. Swings and roundabouts.

If you have substantial amounts in SIPPs as part of your retirement plans and you thought your children would get what's left once you're gone, I can see you (and your offspring!) being pretty annoyed at losing a perk those of us in workplace pensions don't enjoy. That's surely the pool of people any Govt would be targeting. Whether it would be worth the political fallout is another matter.

If wealthy families thought SIPPs were a useful tool for avoiding IHT then they'll have been used for this for decades already. No-one seems that bothered.

In our specific case, if we inherited before we retired we'd consider the kids short term needs before putting any of the remainder into SIPPs. My post was more about whether being prepared to do so if needed was worth the outlay.

EEM

[ursaminortaur]

That is surely though a secondary consideration for most people.

Dod

I'm not so sure you know. A SIPP may be a great option purely on retirement finance grounds for some, but the only real reason for someone with a decent workplace pension to look at one is preservation of multi-generational wealth.

Workplace pensions for high earners may well not use up the full annual allowance so many do actually supplement them with a SIPP. People also open SIPPs alongside their DC workplace pension and transfer funds from the workplace pension to the SIPP every now and then because they have greater flexibility in investments in the SIPP than the funds offered in the DC workplace pensions. DB workplace pensions usually have a much later date for access with large actuarial deductions if you want to take them early hence many who plan to retire early are happy to have a SIPP * they can access at 55 to tide them over until they can take the DB pension without any actuarial adjustment. It simply isn't true that the only reason for someone with a decent workplace pension to have a SIPP is to pass it down to beneficiaries.

*ISAs can also be used for this purpose but if you can afford it then it is a good idea to use both an ISA and a SIPP.

[Urbandreamer]

I'd be astonished if the people who originally drew up the SIPP rules weren't very aware that they would be used in this way .

EEM

And I would be astonished if they considered it might be possible. SIPP's were introduced in 1989, as in BEFORE pension freedoms. Back then you HAD to buy an annuity with your DC scheme when you retired.

[micrographia]

Workplace pensions for high earners may well not use up the full annual allowance so many do actually supplement them with a SIPP. People also open SIPPs alongside their DC workplace pension and transfer funds from the workplace pension to the SIPP every now and then because they have greater flexibility in investments in the SIPP than the funds offered in the DC workplace pensions. DB workplace pensions usually have a much later date for access with large actuarial deductions if you want to take them early hence many who plan to retire early are happy to have a SIPP * they can access at 55 to tide them over until they can take the DB pension without any actuarial adjustment. It simply isn't true that the only reason for someone with a decent workplace pension to have a SIPP is to pass it down to beneficiaries.

*ISAs can also be used for this purpose but if you can afford it then it is a good idea to use both an ISA and a SIPP.

Yes, very fair points, thanks for highlighting them. I was speaking from the position of someone who has decent flexibility in investment choices (and fund charges paid by my employer) in the DC portion of my scheme, has early retirement protection for a good part of the DB portion and is unlikely to retire before 60 .

EEM