“Can I swap my pot for a pension to save my folk tax if I die?”
I get a lot of correspondence from advisers on the impact of changes to taxation of inheritance tax on clients who don’t even make it to the definition HMRC has of “wealthy“.
I had hoped to hold out a defined pension of our own as an alternative to a pot and an improvement on an annuity. I might still do so- watch this blog but that is no response to my advisor.
Here is one I have failed to answer today, can you do any better?
John and Jenny moved from the UK to Portugal in 2023 when John retired. They opted to keep their £500,000 UK property, which had been their family home since the children were young, as they visit a few times a year to spend time with family and friends. They would also like to leave it to their daughter eventually.
They used some of their savings to buy their new Portuguese home, worth £350,000, and left the £260,000 balance invested in the UK. John also has a Self-Invested Pension Fund (SIPP) worth £720,000.
At present, their total estate liable to inheritance tax is £1,110,000, since John’s SIPP is excluded. Their combined nil rate bands (personal and residential) amount to £1,000,000, so their taxable estate is £110,000.
Today, with pensions excluded, their tax liability is £44,000.
However, from April 2027, their financial situation will change significantly.
John’s £720,000 SIPP will be added to their estate, bringing the total value to £1,830,000. Their IHT allowances, however, remain at £1,000,000.
In 2027, with pensions included, the resulting IHT liability is £332,000 – a 655% increase.
I responded
It looks very tough for them
My corresponded answered back
Yes and they don’t meet the HMRC definition of wealthyWith a little more inflation and some fiscal drag it will jump again loosing the inherited house uplift.Then the children will pay up to 45% taking income from the inherited SIPPI guess the Personal representative will have to break the bad news at a further cost.Follow the money It will finish up with the annuity fund of a life company probably not a UK one.Yet another self inflicted wound to the economy and undermining trust in pensionsNone so blind as those that will not see
I replied again
I agree with you . I had hoped to help offer people Pension SuperHaven, a defined benefit available to transfer pensions but can’t because it is being wound up – nobody is prepared to offer a commercial alternative to annuities because there is no certainty how “superfund” legislation will work.
This is an awful state of affairs and a lot of it is down to the DWP and TPR promising the likes of Edi Truell the opportunity to do great things and then taking away the opportunity by not publishing legislation.
The rules around taking money from profits on Pension SuperHaven will be published in 2030 if the Roadmap is to be fulfilled.
The sad thing is that the DWP’s answer to every problem is an annuity. They are happy to talk about CDC as something that we might be able to look forward to but though the rules for commercial DB funds (superfunds as the DWP call them) are promised , they won’t be published till 2030. That will be 13 years after they were launched and 7 years after the full legislation was promised.
All that superfunds have produced so far is a pathway to bulk purchase annuity for four schemes currently being groomed by Clara.
There are places you can swap your pot for a pension (rather than buy an annuity). If you have recently joined LGPS you can, if you are in some unfunded public schemes you can and there are a select few private DB schemes will accept them. But frankly , you need to be working for the public sector to have a decent chance of improving your pension by transferring in our DB pot.
So a bad answer to a good question, but boy do I want to answer the question better in years to come – because people bought pensions when they joined workplace schemes – and to be taxed on their pot because they could only join an annuity is rubbish.
Hello Henry,
“Can I swap my pot for a pension to save my folk tax if I die?”
In particular ‘Yes and they don’t meet the HMRC definition of wealthy’ which (to me as a layman) means those people who have tried to be careful in order to give themselves a bit of reasonable comfort in their retirement, with some provision if they need Care or (like most others have to now) private health because of the state of the NHS.
I understand that Portugal has attractive tax arrangements for British considering retiring there. What happens when you die there, I’m not sure.
Yet again we are seeing that the UK Government is intent on shafting the poor man (those not classed as wealthy) because they’ve got them trapped like fish in a barrel. No doubt the ‘triple-lock’ will soon go, even though working people have paid tax towards it and then even more retirees etc will be thrown onto the benefits system.
Perhaps for the retirees concerned (above) it might be better to get as much cash away to Portugal now and also sell their UK house to their daughter for a £1000.
If the image above is of George Osbourne, he was the Chancellor who steered us into a financial mess even before the collapse of the Banks.
Perhaps, now that Lord Mandleson is at a ‘loose end’ he might have a few rich contacts who can suggest some ideal way out of all these financial snags for those of us who are not wealthy…? (Hopefully not ones in gaol)
Kind regards,
Tim Simpson
Hello Henry,
I lost the text before I had checked it.
With George Osbourne, I meant to say before the Brexit debacle that he was involved in.
Many thanks ,
Tim Simpson
Henry
The writing has been on the wall for sometime.
My move to Portugal was motivated by the economic lunacy of June 2016. My knowledge came from a wider perspective of cross border anomalies and a knowledge of how loss motivation has a much greater impact than greed.
However, for IHT purposes the U.K. move from domicile to residence means that if I have lived for 10 or more years in the U.K. in the last 20 I am still subject to U.K. IHT on worldwide assets. In Portugal I would have no death tax if assets go to spouse children, siblings or parents otherwise 10% which they call Stamp Duty.
So the strategy is to leave all to close relatives, write a will in such a way to avoid the forced heirship rules. Term insurance for 10 years to pay U.K. IHT and a freezer just in case there is more retrospective legislation.
The recent lower tribunal case on tax benefits of Portugal was always a trap worth avoiding though there are new rules to attract innovative employers.
However the climate (300+days of sunshine) rarely below 17C or higher than 30C. A functioning health service and lower cost of living low crime rate are the real benefits of relocating.
We still have to navigate SRT so no more than 15 midnights back in the U.K. and more than 183 in Portugal. Worth reading temporary non resident and associated operations legislation just to keep you awake at night.
We should discuss a new product working title “export your granny”
There is always a silver lining waiting to be found.
So to make a move to Portugal worth while wrt IHT someone in the UK now would have to live there for 20 years? I guess I can stop thinking about that as an option. This country is so depressing at the moment.
If you’re still the same Peter Wilson at http://www.linkedin.com/in/yellowhawk/
then Companies House suggests you’re only 62?
My reading of John’s advice from sunny Madeira is that you need to have at least ten years there, not twenty, to escape IHT.
We’re all entitled to a good moan from time to time, but life ain’t so bad most of the time, even in the UK.
That is me Bryon, and yes I’m now 62. Yes, 10 years makes much more sense. I think I was thrown by the “…if I have lived for 10 or more years in the U.K. in the last 20”, not enough coffee maybe! But yes, after 10 years in Portugal you would indeed have spent 10 out of the previous 20 outside the UK. Thank you!
Apologies for the bad spelling of your name Byron!
If they are only using their house in the UK for a few weeks a year then they should gift that to their children now (assuming they expect/hope to live for at least 7 more years). They should also take their tax free lump sum as soon as possible so at worst their heirs will “only” pay IHT and not IHT+Income Tax. They can also gift that now if they aren’t going to need it. Basically they need to work out what they need for the lifestyle they have and gift everything else.
Sad news about the Pension Superhaven. I’ve retired (early) and using draw down but at some point I was considering getting some guaranteed income from my SIPP and was hoping this would be a better option than an annuity. Ho-hum.
Hi
Only 10 years non resident within the last 20 but do look at the Statutory Residence Test. Having a property available to you in the UK is one of the ties limiting your time in the UK.
To be certain dispose of UK assets and don’t stay in the UK for 16 or more midnights.
My hobby business http://www.emigre.eu is a property buyer’s agent and puts the right advice team in place to help making the move hustle free. Much less stressful than being an IFA for 50 years. full time job evidence of residence in the new jurisdiction.
Getting a nil tax code to enable drawdown to avoid reclaiming tax deducted meets significant hurdles with HMRC but claiming back the overpayment reinforces the proof of non residence.
Medical insurance is available even over 75
Forget the income tax being less, you may even find Income tax more in Portugal. However VFM applied to tax paid is comforting