Is adding pensions into the value of estates shrewd financial policy, or simple graverobbing?
Posted by Turbulent_Ad_880@reddit | AskUK | View on Reddit | 48 comments
The UK will include unspent pension pots in the value of estates starting on the 6th January 2027. I have far from the biggest pension in the world, but taxing it at 40% is going to deprive my loved ones of some £75,000.
I have found only three ways to protect this money from this highway robbery.
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Get married. I'm currently single; this would allow me to transfer assets to my wife/husband (yes a civil partnership is acceptable). For optimal effect this should be someone who is already a beneficiary in my will, otherwise I'm just giving the money to some random person. Also they should ideally be a few years younger than me as if they don't survive me it won't work!
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Adopt someone. This would enable me to pass on my house to them exempt of tax. unfortunately all my friends are adults and I the UK adopting an adult is not allowed; it is commonplace in Japan...but the Japanese adoption would still not be recognised in the UK.
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Die before the 6th April 2027. I have a degenerative health condition anyway, so this is not as outlandish for me as it would be if I were healthy.
What are other British people doing to shield themselves from this unfair tax?
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GlumAd9856@reddit
A pension scheme is the government saying "Rather than paying income tax on what you earn today, you can put some of it in an investment pot and pay tax on it when you withdraw from it at retirement."
Everyone has an obligation to pay their income tax. And the money you put into your pension hasn't been taxed. Hence, it makes sense to me that it's taxed as part of inheritance tax.
Turbulent_Ad_880@reddit (OP)
Except, as I draw only £12,570 a year from my pension the tax is zero. Even if I went over that (up to £54,000, I believe) the income tax would be 20%.
So why is inheritance tax 40%?
Broad-Raspberry1805@reddit
Because you’re dead, so you don’t need the money and your descendants have done nothing to earn it. It’s a free windfall for them. Don’t forget they pay the tax, not you.
Turbulent_Ad_880@reddit (OP)
The government have done nothing to earn it either. I earned it, I should have more say in who I earned it FOR.
rynchenzo@reddit
It's money that you haven't paid tax on, though.
Turbulent_Ad_880@reddit (OP)
And if it was taxed at the same 20%vas income tax when I died, we wouldn't be having this conversation.
XXRelentless999@reddit
If you want that, just don't contribute to a pension and take it immediately, paying tax as received
Turbulent_Ad_880@reddit (OP)
That's a great idea. Can you do me a favour,? Jump in your time machine back to 1984 when I started work and tell my 18 year old self that the government is going to make this change overnight in 42 years' time? Thanks!
XXRelentless999@reddit
The government's very existence is the reason you can earn it
nothingtoseehere____@reddit
The government provides the stable society, healthcare, and education that allows you to earn anything at all.
Turbulent_Ad_880@reddit (OP)
No, the people provide that. The government just applies rules to it and sucks money out of it.
There are far more opportunities for personal wealth gain in unstable societies.
I think what I object to the most is the lack of any gradual introduction of this rule. Just overnight, government get a huge injection of cash. If a business tried this, the same government would talk about applying a windfall tax!
nothingtoseehere____@reddit
Well, if you think you could win the contest of violence that lack of any governing authority provides, there's always Somalia...
Turbulent_Ad_880@reddit (OP)
All governments at some point found their way into power by winning a contest of violence.
Hobgoblin84@reddit
Most people could say the same thing about income tax.
Turbulent_Ad_880@reddit (OP)
Income tax 20%. Inheritance tax 40%. Why?
Ok_Light_7227@reddit
No, you shouldn't.
SavageRabbitX@reddit
This
DaveBeBad@reddit
It’s 40% only on the portion over and above £325,000.
If your estate is worth £650,000, you’d pay 20% on the entire estate and above that, less still.
Turbulent_Ad_880@reddit (OP)
Still works out to £70k tax bill for my beneficiaries in my case.
DaveBeBad@reddit
A £70k tax bill for you (well, your estate really). Your beneficiaries don’t pay anything. It comes out of your estate before it’s distributed.
And there are ways to avoid/minimise it.
matcha-morning@reddit
Yes, and I don't pay income tax either because it is deducted from my salary before it hits my account.
Turbulent_Ad_880@reddit (OP)
Very few, and fewer still that suit the uncertainty of my "not terminal but critical degenerative condition".
trmetroidmaniac@reddit
The pension is subject to IHT at inheritance and also income tax at drawdown, so this is a double taxation. IMO this is unfair.
gensererme@reddit
At the end of the day you're comparatively wealthy. Working people in the UK are paying out the nose for pensioners every single day, it's absolutely crushing public finances.
If you didn't end up using some of the immense benefits you were given (state pension paying much more than the average pensioner ever paid in, huge relief on pension saving, golden ticket in the housing market if you're the right age... and a bunch of other stuff) that nobody young today will ever experience, I think it's fair we claw some of that back.
Though I tend to agree the IHT rate is too high, I'd lower the rate but make it much harder to dodge.
Turbulent_Ad_880@reddit (OP)
Two paragraphs of sour grapes and then a paragraph of surprisingly sweet wine...
I'm not yet of pensionable age, so not drawing my state pension. Because of my Parkinson's disease I probably never will (really don't see me lasting another eight years, and will be in a seriously bad way if I do)...so I've contributed my NI dues for some 40 years of continued employment...for no return.
I'm only "reasonably wealthy" because most of my capital came from the sale of my house (your "golden ticket") but over the twenty years we owned it, between the two of us we paid in far more to fix it than we got back. We didn't just leave it as it was and let it grow in value. It was in fact a money pit, and I would say we restored a valuable piece of history.
On the other hand, though I think you missed the mark in assuming who I represented, I 100% agree with you on your last paragraph; IHT is too damned high at 40%, and certainly at the 67% that is mooted in some cases. As they say, at least Dick Turpin had the decency to wear a mask...I assume the same goes for Burke and Hare.
Jcw28@reddit
Draw it down in excess of your needs, suffer the income tax, and use gifts out of excess income exemption to pass the net amounts on to people in a way that is exempt from IHT. This might sound like it's costing tax, but it's actually cheaper to pay 20/40% income tax (you probably wouldn't do it at 45%) than to pay 40% IHT and the beneficiary of your pot also potentially suffering income tax when they draw the net pot out. The effective tax rate on pension pots can go as high as about 63% due to the new rules.
P.s. your second point isn't technically correct as you cannot be able you house IHT free. It enables access to the Residence Nil Rate Band which helps give more tax-free inheritance, but it doesn't completely exempt the house.
I'm glad of the general financial ignorance in the UK as it keeps me employed as a chartered accountant and tax advisor!
Turbulent_Ad_880@reddit (OP)
You're correct about the house system....but at £90k value at best, the Residence Nil Rate Band would more than cover the value of my tiny terraced house.
Jcw28@reddit
Based off the limited information you are probably in that bucket that is best off drawing your pension and spending your liquid assets then. Get yourself down to £425k total assets (£325k other assets plus say £100k house) and your NRB and RNRB will cover your entire estate. Bear in mind however you need a lineal descendant to get access to the RNRB, not sure if you have one. I wouldn't suggest creating a child solely for the RNRB is the most efficient plan overall!
If you don't need the income then gifts out of excess income is definitely an option. That is if you are genuinely worried about passing away soon and your IHT position is a concern. Caveat that these are generic comments rather than formal advice, don't know everything about your specific situation!
undefetter@reddit
It seems you aren't really asking the question in your title but are rather pre-decided it is bad and are more asking for ways to avoid it, but I'll take your original question at face value.
Personally, I'd rather we taxed inheritance than pretty much any other form of tax. Life expectancy in the UK is ~80, average age for having a child in the UK is ~32.5 (31 for women, 34 for men). This means that on average people will be 47.5 when their parents die.
At 47, you are well into your career, on average you've owned your house for home for over a decade (first time buyer average age ~33.5, and ~63% of people own their home), and so you are very well settled into your financial situation.
As such, inheritance is basically just a windfall you don't financially need. As someone in the higher tax bracket I'd love to be able to leave enough money for my kid that they can quit work the day me and my wife die but if I could choose between that and a 1% increase in income tax I'd choose the IHT every time. IHT is only ~1% of the government's overall income, but I'd much rather be taxed at the end of my life, at the point I don't need it and at the point my family are well into their careers, than be taxed when I'm alive or when my family are getting established.
Asleep-Software-4160@reddit
Hah! Welcome to AskUK!
Turbulent_Ad_880@reddit (OP)
I'm not going to pretend I have no opinion, but I'm genuinely interested in the opinions of others too.
Don't judge. Ask questions.thats how we learn.
Turbulent_Ad_880@reddit (OP)
I am childless, 59 and with no other close relatives. My friends are my family. Why does the government decide that people who are unlucky enough to be alone cannot have an option to treat a close friend as a spouse or child?
Yes, I have actually discussed the marriage possibility with all my beneficiaries including my one living relative - a third cousin twice removed. (Don't get too outraged; she's also 72 and married, so discussed it more as a joke).
Big_Lavishness_6823@reddit
This. Tax the dead over taxing the living.
Known-Importance-568@reddit
Whilst I agree in principle to many commenters here inheritance tax mostly impacts the middle class. You can talk about the free windfall and how kids do nothing to deserve it but your millionaires and billionaires all have convenient ways to avoid paying IHT all together.
If you think someone buying a home in 1996 for £100k now worth £1m passing to their kids having to sell the family home to pay the bill is fair when David Becham can leave hundreds of millions to his kids via various reliefs/exemptions then I'd have to disagree.
For some reason it's always the working/middle that justify taxation when the richest pay the lowest marginal rates in comparison.
HandsOfGawd@reddit
Seems fair to me. If you’re going to have an inheritance tax is makes sense to include all assets. Otherwise you get strange distortions
Over-Language2599@reddit
Don't forget downsizing relief. Move into the smallest possible property or better yet rent. Save much more than the pension tax loss.
Turbulent_Ad_880@reddit (OP)
Regrettably I'm already in the smallest house possible, and as my health starts to deteriorate the traditional "two up two down" type house with it's "North face of the Eiger" stairs will become more and more untenable.
I'm actually thinking of spending the money on some house modification to make it more disability friendly. Unusually, spending money on a property that is unlikely to offer much in terms of increase in value could be exactly what I want!
DreamyTomato@reddit
Spend it on a stair lift and some nice things for your house. Big screen, games station, etc if that’s what you want. Food delivered from Waitrose or M&S if that’s what you’re into.
You worked hard, you’ve built up a decent pension, use it to give yourself a nice life.
Another option if you’re determined to pass it on with minimal tax is to just gift the money. I think you can gift up to £3k total tax free per year. Over £3k, if you can survive more than 3 years without pegging it, inheritance tax starts reducing.
Turbulent_Ad_880@reddit (OP)
I have all those things already. The likelihood of me "pegging it" within three years is higher than average. I've made some gifts, but still potentially facing this £70,000 demand on my estate overnight...that's another thing they could at least have faded it in, or increased the tax threshold to £500k, then stepped it down over subsequent years.
It's not right that I'm seriously considering making a conscious exit (good grief I sound like Gwyneth Paltrow!) sometime early April 2027.
Over-Language2599@reddit
I have moved into a 1-bed ground floor flat. But you have to do what suits you, of course.
Mobile_Lynx_7932@reddit
It’s a pension pot. The clue is is the name.
Turbulent_Ad_880@reddit (OP)
Estate without pension was probably around £150k including cash in accounts, house and all belongings.adding in pension takes it to just over £500k, meaning IHT is likely to be 40% of £175,000 or £~70k.
NoExperience9717@reddit
So your estate is worth over 325k? Practically if your beneficiaries are getting value from your pension via monthly payouts then it's fair for it to be taxed otherwise that's a pretty nice tax avoidance wheeze. The main issue is going to be raising cash to pay the IHT. Usually not an issue for married or civil partners due to the exemption though.
CrassulaOrbicularis@reddit
You missed the options of: Spend it yourself. Leave it to charity - if the aim is to minimise tax rather than maximise what beneficiaries get.
Turbulent_Ad_880@reddit (OP)
"Spend it myself" was my FA's only suggestion, hard to do when you're nearly housebound by illness.
Classic_Drama_965@reddit
There is nothing unfair about it. Pensions specifically have not been subject to income tax or national insurance. Unlike the income people have to go to work everyday for. What did the beneficiaries do to deserve this tax free pay out?
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