Raising the LTA to get the over 50's off the golf course

[TedSwippet]

However, as pointed out by others, you don't have to pay HRT. No, not even if you have a £1m pot. You certainly don't HAVE to withdraw £50kpa (5% of £1m) giving an income of about £60k. You could choose to draw £40kpa (4%), which after state pension just drops into the 20% band.

So what happens to the money you don't draw? ... If however it's a DC scheme you simply leave the money to who you like.

I think you're forgetting the forced LTA test at age 75.

If you don't draw the money, at HRT if necessary, on your 75th birthday the government will relieve you of 25% of the excess over the LTA that you didn't draw, after which (of course) you still face income tax on the remaining 75%.

[Urbandreamer]

I think you're forgetting the forced LTA test at age 75.

If you don't draw the money, at HRT if necessary, on your 75th birthday the government will relieve you of 25% of the excess over the LTA that you didn't draw, after which (of course) you still face income tax on the remaining 75%.

I didn't forget, just thought that the complexity would obscure my point.

I didn't want to get into the details of how your beneficiaries would receive the pension "tax free" (meaning free from IHT), but may pay income tax upon it depending upon how old you were when you died.

"Tax shouldn't be taxing", sure!
"The office of tax simplification", well the government is really keen on tax simplification!

[flyer61]

A very interesting thread which I am sure would make for a lively discussion if we all ended up down the pub.

Has anybody considered that some of these people that Hunt et al want back in the workplace just don't want to be there. I work for a Company that is in the business of transport. A to B and B to A and ideally not C. But that is not what large numbers of the workforce actually spend their days doing. Work is a wokathon of ESG, diversity, inclusion etc etc. Pity help you if you are not on message. There must be many who do not recognise todays workplace and decide they would rather exit it. I don't blame them.....

[hiriskpaul]

Paying HRT on pension withdrawls is very common. If you have a £1m pot and a full state pension, 5% withdrawls will take you to the HRT threshold. Not an impossible total return for equity, and thats before you start returning capital, which is what you' expect from a pension. If you don't return the capital you are taxed heavily on its inflationary growth.

5% (increasing with inflation) drawdown is pushing your luck. Historically 5% would have been ok most of the time, but there is a significant risk that future returns and/or sequence of returns will mean 5% is not sustainable and 4% is much safer. If you have a £1m pension pot, then you can take out £250k free of tax, leaving £750k. 4% of that is £30k, leaving headroom of £10k before HRT kicks in (assuming £10k SP). £10k headroom at 4% means the pension pot can be £250k bigger at the start before being concerned about higher rate tax. Personally I think 4% is too high a risk these days and would not be happy going beyond 3.5%.

If you factor in the potential IHT savings then paying an LTA charge and 40% tax on withdrawal, it still works out better to fund the pension. eg £24k net from higher rate taxpayer becomes £40k in the pension, 25% LTA charge and 40% income tax on withdrawal takes that down to £18k. ie a loss from funding the pension (ignoring the tax free return on investments). But if that £24k eventually became subject to IHT it would only be worth £14.4k if taxed at 40%, £15.36k after 36% IHT. For many people housing wealth is likely to take up their full IHT allowance, meaning any investments will be suject to IHT. Putting money into a pension may end up being the least worst option for some people.

The lower tax rates for unsheltered dividends and capital gains means that you once you get a SP to cover your PA, you should drain any pension fast, up to HRT, pay 15% tax, then pay 10%ish tax (or none if ISA'd) outside the pension. Its a very odd setup for an investment designed to cover your life that its main advantage is avoiding death taxes

We do the complete opposite! We spend from assets outside ISAs first. If/when that is gone we will draw down the ISAs. If ISAs run out our SIPPs are the safety net to be drawn last. Anything left over in the SIPPs can be passed on to others free of IHT to draw as they see fit. The SIPPs have been fully crystallised though which we did that below our LTAs, but we are expecting to have to pay an LTA charge of 25% of growth at age 75. Losing 25% of the growth is better than losing 36% to 40% in IHT, which would happen if we pulled money into our estate before it was needed for consumption.

The current tax rules (income, CGT, IHT) favour this order of withdrawal, unsheltered investments, ISAs then SIPPs, for us at least. If IHT was introduced on SIPPs, then that would certainly require a rethink!

[Urbandreamer]

The current tax rules (income, CGT, IHT) favour this order of withdrawal, unsheltered investments, ISAs then SIPPs, for us at least. If IHT was introduced on SIPPs, then that would certainly require a rethink!

It may require a rethink anyway.

Let us assume that you die at 75+ with £100k in your DC pension. It's left to your only child, who currently earns £30k.
They escape IHT, but must pay income tax at their marginal rate. Hence, their tax band moves from 20% to 45%.
Were the money outside the pension, the entire amount might be taxed at 40%, or not taxed at all, because you spent your other funds on a care home.

Were they to currently be a 40% taxpayer, they would definitely pay more income tax than they would IHT on the same funds just because you had lived past 75.

The maths gets very taxing. It changes depending upon estate size, DC pot, number of children and what they earn.

It's perverse, but such is what the government has decided.

[SebsCat]

The current tax rules (income, CGT, IHT) favour this order of withdrawal, unsheltered investments, ISAs then SIPPs, for us at least. If IHT was introduced on SIPPs, then that would certainly require a rethink!

It may require a rethink anyway.

Let us assume that you die at 75+ with £100k in your DC pension. It's left to your only child, who currently earns £30k.
They escape IHT, but must pay income tax at their marginal rate. Hence, their tax band moves from 20% to 45%.
Were the money outside the pension, the entire amount might be taxed at 40%, or not taxed at all, because you spent your other funds on a care home.

Were they to currently be a 40% taxpayer, they would definitely pay more income tax than they would IHT on the same funds just because you had lived past 75.

The maths gets very taxing. It changes depending upon estate size, DC pot, number of children and what they earn.

It's perverse, but such is what the government has decided.

The child doesn't have to take the inherited pension pot as a single lump sum but can use it to provide an income. Therefore if their current income is £30k they can take £20k a year and only pay basic rate tax on it.

[scotview]

I was just watching a discussion on Bloomberg re the BoE 50 point interest rate rise and inflation. One of the presenters said that one of the UK's main problems was the number of over 50's out of the jobs market.

Where are these hundreds of thousands of over 50's getting their incomes from. Have they accepted a lower standard of living and are living off their investments or have they discovered the wonderful world of benefits ?

[hiriskpaul]

The current tax rules (income, CGT, IHT) favour this order of withdrawal, unsheltered investments, ISAs then SIPPs, for us at least. If IHT was introduced on SIPPs, then that would certainly require a rethink!

It may require a rethink anyway.

Let us assume that you die at 75+ with £100k in your DC pension. It's left to your only child, who currently earns £30k.
They escape IHT, but must pay income tax at their marginal rate. Hence, their tax band moves from 20% to 45%.
Were the money outside the pension, the entire amount might be taxed at 40%, or not taxed at all, because you spent your other funds on a care home.

Were they to currently be a 40% taxpayer, they would definitely pay more income tax than they would IHT on the same funds just because you had lived past 75.

The maths gets very taxing. It changes depending upon estate size, DC pot, number of children and what they earn.

It's perverse, but such is what the government has decided.

Yes, the complexity makes it very difficult to make decisions. In the scenario you present I agree that the child taking a lump sum could be taxed quite heavily. My advice to them would be to take the beneficiary SIPP option instead of a lump sum. They can then draw down in a more tax efficient manner.

[Urbandreamer]

Yes, the complexity makes it very difficult to make decisions. In the scenario you present I agree that the child taking a lump sum could be taxed quite heavily. My advice to them would be to take the beneficiary SIPP option instead of a lump sum. They can then draw down in a more tax efficient manner.

Draw from the age of 57, possibly hit the LTA by that point, and definitely by 75.
However, doing so would give them the option of spending income, rather than contributing to their own pension.

Thanks to all that pointed out that they don't need to take it as a lump sum. I thought that to be the case, but initial research never mentioned a mechanism to distinguish it from other savings.

[hiriskpaul]

Yes, the complexity makes it very difficult to make decisions. In the scenario you present I agree that the child taking a lump sum could be taxed quite heavily. My advice to them would be to take the beneficiary SIPP option instead of a lump sum. They can then draw down in a more tax efficient manner.

Draw from the age of 57, possibly hit the LTA by that point, and definitely by 75.
However, doing so would give them the option of spending income, rather than contributing to their own pension.

Thanks to all that pointed out that they don't need to take it as a lump sum. I thought that to be the case, but initial research never mentioned a mechanism to distinguish it from other savings.

There is no age restriction on beneficiary drawdown pensions. AFAIK even minors are allowed to draw from a beneficiary flexi-access drawdown pension. The lump sum option is fairly crazy except in a limited number of cases.

[Gerry557]

I was just watching a discussion on Bloomberg re the BoE 50 point interest rate rise and inflation. One of the presenters said that one of the UK's main problems was the number of over 50's out of the jobs market.

Where are these hundreds of thousands of over 50's getting their incomes from. Have they accepted a lower standard of living and are living off their investments or have they discovered the wonderful world of benefits ?

Unlikely benefits but more likely independent means. Inheritance, shares, BTL private pension. Some are said to be too sick to work so might be surviving with some sort of benefit.

Lots seem to be doctors affected by the LTA. It depends on how much you need money and what level of spending you have. I'd also add job satisfaction and family circumstances into the mix. Grandma might need looking after and your job might not be nice or dangerous.

For me it was investments built up so I might be stacking shelves if we get a depression

[BigTim]

There is no age restriction on beneficiary drawdown pensions. AFAIK even minors are allowed to draw from a beneficiary flexi-access drawdown pension. The lump sum option is fairly crazy except in a limited number of cases.

That's interesting. I see a split between those prioritising IHT avoidance (the primary desire is to maximise what is passed on hence burning all assets outside the SIPP first) and those that want to maximise their own benefit from the funds that have been saved (hence drawing from SIPP in addition to using their other investments). I'd lean towards the latter having, hopefully, made respectable provision for our children through my lifetime and set them up to earn themselves rather than waiting for dad to peg out (sorry).

But, I'm surprised that, say Dad does pass on (me I mean), the kids might, immediately, be able to "FIRE" at whatever age because they can draw the SIPP.

[hiriskpaul]

There is no age restriction on beneficiary drawdown pensions. AFAIK even minors are allowed to draw from a beneficiary flexi-access drawdown pension. The lump sum option is fairly crazy except in a limited number of cases.

That's interesting. I see a split between those prioritising IHT avoidance (the primary desire is to maximise what is passed on hence burning all assets outside the SIPP first) and those that want to maximise their own benefit from the funds that have been saved (hence drawing from SIPP in addition to using their other investments). I'd lean towards the latter having, hopefully, made respectable provision for our children through my lifetime and set them up to earn themselves rather than waiting for dad to peg out (sorry).

But, I'm surprised that, say Dad does pass on (me I mean), the kids might, immediately, be able to "FIRE" at whatever age because they can draw the SIPP.

I would not say I was "prioritising IHT avoidance", which would actually be illegal if taken literally. It is more a case of taking IHT as part of the mix with other taxes and levies instead of just ignoring it because it is too hard or whatever. The fact is my wife and I could die at any time and if that happened tomorrow there would be a considerable IHT bill. It makes sense to me to mitigate and navigate that risk. Drawing down our SIPPs is not likely to help. We could give away more to beneficiaries, the gifts dropping out of our estate after 7 years. However I am cognisant of handing over too much too early, as you allude to with kids having access to a beneficiary pension (at present they would inherit our pensions totally free of tax). Warren Buffett put this issue succinctly when he said he gave his children enough money so that they would feel they could do anything, but not so much that they could do nothing.

There is also the difficult aspect of how much you think you need to hang on to. Annuitising the SIPPs would be a way around that. If annuities provided a guaranteed inflation linked income sufficient for someone's desired standard of living, then the rest could potentially be given away to beneficiaries and charities. Not an unreasonable approach from a IHT mitigation angle, but for the lottery of having to pay very high care home fees later in life for which the annuities may be insufficient. I find it niggling as well that annuities are such bad value for money. I didn't get where I am today by buying bad value for money financial products.

[BigTim]

I would not say I was "prioritising IHT avoidance", which would actually be illegal if taken literally.

it would not. Avoidance is legal, evasion is illegal. Using an ISA is a legal CGT avoidance strategy

It is more a case of taking IHT as part of the mix with other taxes and levies instead of just ignoring it because it is too hard or whatever. The fact is my wife and I could die at any time and if that happened tomorrow there would be a considerable IHT bill. It makes sense to me to mitigate and navigate that risk. Drawing down our SIPPs is not likely to help. We could give away more to beneficiaries, the gifts dropping out of our estate after 7 years.

I understand, it's a spectrum between "don't care about leaving a legacy" to "my priority is to reduce the tax bill that occurs when I'm dead" Sorry, I didn't mean to imply you were at one end of the scale, only that I sat in a different place on it to some people.

However I am cognisant of handing over too much too early, as you allude to with kids having access to a beneficiary pension (at present they would inherit our pensions totally free of tax). Warren Buffett put this issue succinctly when he said he gave his children enough money so that they would feel they could do anything, but not so much that they could do nothing.

Perfect. I remember another quote from the Sage's daughter: "What people don't realise about my father is that if I write him a cheque for $25, he banks it"

What better legacy than to educate children about fiscal responsibility ?

There is also the difficult aspect of how much you think you need to hang on to. Annuitising the SIPPs would be a way around that. If annuities provided a guaranteed inflation linked income sufficient for someone's desired standard of living, then the rest could potentially be given away to beneficiaries and charities. Not an unreasonable approach from a IHT mitigation angle, but for the lottery of having to pay very high care home fees later in life for which the annuities may be insufficient. I find it niggling as well that annuities are such bad value for money. I didn't get where I am today by buying bad value for money financial products.

Absolutely, there are so many ways to play this and it's endlessly frustrating to me that some options, particularly those for guaranteed index linked income, are such poor value unless you happen to be lucky enough to be in a defined benefit scheme (like LGPS) that allows you to buy extra income.

My Dad retired at 54 with a civil service pension. Very different times.

[pje16]

My Dad retired at 54 with a civil service pension. Very different times.

My dad did the same at 57, he's now 92 and still OK for money

[hiriskpaul]

I would not say I was "prioritising IHT avoidance", which would actually be illegal if taken literally.

it would not. Avoidance is legal, evasion is illegal. Using an ISA is a legal CGT avoidance strategy

Not according to the HMRC.

Tax avoidance:

Tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.

https://www.gov.uk/guidance/tax-avoidan ... troduction

Investing in an ISA, a Parliament approved tax saving device is not tax avoidance. Neither is paying money into a pension, participating in an EIS, making CGT free gains on gilts/QCBs, buying premium bonds or giving to charity.

Edit: more to the point, stopping working because you have had enough of it and have become financially independent is not tax avoidance either! Although you will pay less tax.

[MyNameIsUrl]

Tax avoidance versus tax evasion versus tax mitigation:
https://monevator.com/tax-avoidance-versus-tax-evasion/

An article from 2017 - I suspect the language has continued to evolve since then

[pje16]

Tax avoidance versus tax evasion versus tax mitigation:
https://monevator.com/tax-avoidance-versus-tax-evasion/

An article from 2017 - I suspect the language has continued to evolve since then

As I always say
Avoidance is fine
Evasion is naughty

[hiriskpaul]

Tax avoidance versus tax evasion versus tax mitigation:
https://monevator.com/tax-avoidance-versus-tax-evasion/

An article from 2017 - I suspect the language has continued to evolve since then

As I always say
Avoidance is fine
Evasion is naughty

No it isn't! Historically that may have been true. Now though Avoidance may well not be fine at all and the HMRC may rule retrospectivley that what you have done is absolutely not fine, demand the tax and hit you with penalties. You can of course challenge in the High Court, but unless you have very deep pockets that would be most unwise.

[BigTim]

I would not say I was "prioritising IHT avoidance", which would actually be illegal if taken literally.

it would not. Avoidance is legal, evasion is illegal. Using an ISA is a legal CGT avoidance strategy

Not according to the HMRC.

Tax avoidance:

Tax avoidance involves bending the rules of the tax system to try to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.

https://www.gov.uk/guidance/tax-avoidan ... troduction

Investing in an ISA, a Parliament approved tax saving device is not tax avoidance. Neither is paying money into a pension, participating in an EIS, making CGT free gains on gilts/QCBs, buying premium bonds or giving to charity.

Edit: more to the point, stopping working because you have had enough of it and have become financially independent is not tax avoidance either! Although you will pay less tax.

Er yes according to HMRC, you said that if it were tax avoidance it would be illegal, but you've quoted something that says it's legal

It's always been the principle that one may arrange one's affairs however one sees fit to legally minimise the tax paid and I take the point that schemes specifically created by the govt with the intent of encouraging people to allocate capital in a particular way, with the incentive of avoiding tax (VCTS, ISAs, EIS etc) are not considered "avoidance" by HMRC.

It's that "contrived" bit that's key. Because investing in a film scheme was certainly not tax avoidance (the film tax credits were set up to encourage investment in the film industry just like EIS and other govt incentives). Until it definitely was because the schemes were being "contrived"

I remember many years ago (when I contracted through a ltd company) being contacted by an accountant very eager to get me to use a contrived (though perfectly legal, as verified by barristers she was at pains to point out) loan scheme to reduce my tax rate to single digits. I felt it was too convoluted and in addition to a moral consideration, too apt to be attacked by retrospective legislation so I declined despite entreaties. So it proved

https://www.gov.uk/government/publicati ... oan-charge

The schemes remained legal but were taxed retrospectively.