“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.
