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Should we drawdown our SIPPs?

hiriskpaul
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Should we drawdown our SIPPs?

#315371

Postby hiriskpaul » June 4th, 2020, 11:25 pm

This is an issue I have been vaccilating over for some time.

My wife and I have assets that put us way into inheritance tax territory. We could sell our property and much of our other non pension assets, give the money to our kids and go and live somewhere cheaper, but we are not very inclined to do that. Not yet anyway. If we want to continue to live in a decent property in London, which we do want to do at present, it is very hard to avoid being "at risk" of inheritance tax, even with the various nil rate bands.

So given we are in IHT territory and likely to stay that way, I have been wondering whether we should be drawing from our SIPPs, probably the best IHT avoidance option there is. At the moment we are planning to only draw enough to fill up our basic rate tax bands, after all our other taxable income has been taken into consideration. This is likely to mean paying the LTA excess charge when we reach 75, so we are in excess charge territory as well as IHT territory. For every £100 we take from our SIPPs, we pay £20 tax at basic rate. Given that we are in IHT land, that's another £80 in our estates to pay IHT on, so another £32 gone, resulting in £48 after income tax and IHT for every £100 drawn. The alternative is to leave the £100 in the SIPPs, which means paying the £25 excess charge on it. Our beneficiaries could then draw the remaining £75 and pay £15 of basic rate tax, leaving £60 from the original £100, instead of the £48 if we draw down and pay basic rate tax (and eventually IHT). That's 25% more after tax cash.

It seems to me, if all tax and pension rules stay as they are, that it would be better for us not to draw from our SIPPs until we have exhausted our other savings, investments, ISAs, etc. even if that means paying a higher LTA excess charge. At least that's what the maths says, but it feels wrong. Especially so if it eventually means drawing down ISAs knowing that we are increasing our LTA excess charge. There is risk of course in the statement "if all tax and pension rules stay as they are", because they almost certainly will not, but we can only really plan on what we know now and what is likely to happen. Guessing how pension and tax may change justs adds to the decision making.

Then throw in the additional benefit that if one of us dies before age 75, the SIPP can be drawn entirely free of tax. What the best order to draw down might be in that case is something I have not even considered.

Anyone else just leaving their SIPPs as long as possible?

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Re: Should we drawdown our SIPPs?

#315372

Postby Lootman » June 4th, 2020, 11:32 pm

I do not have a SIPP. But with that caveat it is my belief that the structures that work best for tax relief while you are alive (ISAs, SIPPs, primary residences) are absolutely the worst assets to own from an IHT perspective. it's like you spend a lifetime mitigating tax only to have the government mug 40% of the value when you die.

So I believe that you reach a point in your life where and when you cash out these tax-advantaged structures and instead divert the funds to a vehicle that is far more flexible. IHT is a tax on the unprepared.

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Re: Should we drawdown our SIPPs?

#315377

Postby swill453 » June 4th, 2020, 11:56 pm

Lootman wrote:I do not have a SIPP. But with that caveat it is my belief that the structures that work best for tax relief while you are alive (ISAs, SIPPs, primary residences) are absolutely the worst assets to own from an IHT perspective. it's like you spend a lifetime mitigating tax only to have the government mug 40% of the value when you die.

So I believe that you reach a point in your life where and when you cash out these tax-advantaged structures and instead divert the funds to a vehicle that is far more flexible. IHT is a tax on the unprepared.

I think that's wrong, and a SIPP is one of the best things to have from an IHT perspective.

Scott.

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Re: Should we drawdown our SIPPs?

#315379

Postby Lootman » June 5th, 2020, 12:08 am

swill453 wrote:
Lootman wrote:I do not have a SIPP. But with that caveat it is my belief that the structures that work best for tax relief while you are alive (ISAs, SIPPs, primary residences) are absolutely the worst assets to own from an IHT perspective. it's like you spend a lifetime mitigating tax only to have the government mug 40% of the value when you die.

So I believe that you reach a point in your life where and when you cash out these tax-advantaged structures and instead divert the funds to a vehicle that is far more flexible. IHT is a tax on the unprepared.

I think that's wrong, and a SIPP is one of the best things to have from an IHT perspective.

I understand that argument, But the government loves pension funds precisely because they control the legislation around them. It is captive money.

If all your net worth is free capital then you can mitigate political interference the most effectively. It can vanish overseas in a nanosecond.

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Re: Should we drawdown our SIPPs?

#315383

Postby xxd09 » June 5th, 2020, 12:33 am

It’s not a problem I have but some of my children and friends do
I am interested watching what they are doing
There are not many legal ways to avoid paying lots of tax once you reach a certain level of wealth
The very rich no doubt have access to fancy accountants-did not do those footballers any good!
I note that my kids are investing in property with all the hassle that entails-expecting capital growth?
Others of my wealthy friends are giving their excess monies to their kids and hoping to live for 7 years-life Insurance can help if you die too soon
No easy legal escape!
xxd09

hiriskpaul
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Re: Should we drawdown our SIPPs?

#315384

Postby hiriskpaul » June 5th, 2020, 12:36 am

Lootman wrote:I do not have a SIPP. But with that caveat it is my belief that the structures that work best for tax relief while you are alive (ISAs, SIPPs, primary residences) are absolutely the worst assets to own from an IHT perspective. it's like you spend a lifetime mitigating tax only to have the government mug 40% of the value when you die.

So I believe that you reach a point in your life where and when you cash out these tax-advantaged structures and instead divert the funds to a vehicle that is far more flexible. IHT is a tax on the unprepared.

We are where we are. I cannot go back and change what capital we have built in SIPPs and ISAs, but I can choose what assets that go in them and what order to draw down. I have looked at trusts and putting assets offshore, but there are serious drawbacks with all such schemes unless you don't mind trying tax evasion.

Not drawing the SIPP looks like 40% is lost in tax on the amount over the LTA before my beneficiaries receive the money, assuming beneficiaries pay 20% tax on withdrawal. Drawing it means 52% is lost. A 40% loss still means my beneficiaries are up on the deal as I got more tax and NI relief than that by paying into the SIPP.
Last edited by hiriskpaul on June 5th, 2020, 12:43 am, edited 1 time in total.

hiriskpaul
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Re: Should we drawdown our SIPPs?

#315385

Postby hiriskpaul » June 5th, 2020, 12:42 am

xxd09 wrote:It’s not a problem I have but some of my children and friends do
I am interested watching what they are doing
There are not many legal ways to avoid paying lots of tax once you reach a certain level of wealth
The very rich no doubt have access to fancy accountants-did not do those footballers any good!
I note that my kids are investing in property with all the hassle that entails-expecting capital growth?
Others of my wealthy friends are giving their excess monies to their kids and hoping to live for 7 years-life Insurance can help if you die too soon
No easy legal escape!
xxd09

Yes, beware of the tax tail wagging the dog. Fancy accountants and offshore schemes can easily work out costing more than the tax saved - especially when they go wrong!

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Re: Should we drawdown our SIPPs?

#315389

Postby Dod101 » June 5th, 2020, 12:49 am

Frankly I am less than concerned about what how much IHT is payable on my estate. I will not be there to worry about it and my beneficiaries will, I expect, be grateful for what they get. These days there are a lot of 'escape rules' or at least 'mitigation rules' for IHT (including leaving at least 10% of your chargeable estate to charity, thus reducing the charge from 40% to 36%)

Otherwise, it seems to me that the maths dictate the way you should extract funds for your own living costs. In any case, they are your assets and you have no responsibility for your beneficiaries so just go the way that is most beneficial to you at this time. Anything left for your family/beneficiaries is a bonus for them. It is not for you (or me!) to worry about that. You might even feel good about contributing to the enormous borrowing by the Government of the day.

Dod

hiriskpaul
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Re: Should we drawdown our SIPPs?

#315390

Postby hiriskpaul » June 5th, 2020, 12:53 am

Lootman wrote:
swill453 wrote:
Lootman wrote:I do not have a SIPP. But with that caveat it is my belief that the structures that work best for tax relief while you are alive (ISAs, SIPPs, primary residences) are absolutely the worst assets to own from an IHT perspective. it's like you spend a lifetime mitigating tax only to have the government mug 40% of the value when you die.

So I believe that you reach a point in your life where and when you cash out these tax-advantaged structures and instead divert the funds to a vehicle that is far more flexible. IHT is a tax on the unprepared.

I think that's wrong, and a SIPP is one of the best things to have from an IHT perspective.

I understand that argument, But the government loves pension funds precisely because they control the legislation around them. It is captive money.

If all your net worth is free capital then you can mitigate political interference the most effectively. It can vanish overseas in a nanosecond.

My property cannot vanish overseas. Even if the more liquid assets can they are still subject to IHT, unless my executors lie about them. Or we domicile elsewhere, which we are not prepared to do.

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Re: Should we drawdown our SIPPs?

#315393

Postby hiriskpaul » June 5th, 2020, 1:08 am

Dod101 wrote:Frankly I am less than concerned about what how much IHT is payable on my estate. I will not be there to worry about it and my beneficiaries will, I expect, be grateful for what they get. These days there are a lot of 'escape rules' or at least 'mitigation rules' for IHT (including leaving at least 10% of your chargeable estate to charity, thus reducing the charge from 40% to 36%)

Otherwise, it seems to me that the maths dictate the way you should extract funds for your own living costs. In any case, they are your assets and you have no responsibility for your beneficiaries so just go the way that is most beneficial to you at this time. Anything left for your family/beneficiaries is a bonus for them. It is not for you (or me!) to worry about that. You might even feel good about contributing to the enormous borrowing by the Government of the day.

Dod

Ok, if that's how you feel. I do feel a responsibility to make decisions that are to the benefit of those who come after me, especially with decisions that make little difference to me. As far as I can judge right now it does not matter much to me whether I spend a pound from an ISA or a pound from a SIPP, but it looks as though it might make a substantial difference to my beneficiaries. Unless someone can see a flaw in my logic, which I would be very interested in hearing about.

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Re: Should we drawdown our SIPPs?

#315414

Postby Urbandreamer » June 5th, 2020, 7:21 am

hiriskpaul wrote:At the moment we are planning to only draw enough to fill up our basic rate tax bands, after all our other taxable income has been taken into consideration. This is likely to mean paying the LTA excess charge when we reach 75, so we are in excess charge territory as well as IHT territory.


I'm not sure that I follow you. The LTA is now linked to inflation. It is also an "allowance" of how much can be removed from a pension.

If we assume a pension only just below the LTA today and grows at the same rate as inflation, then there will never be tax to pay.
If you are currently above the LTA, then you will start to pay when the calculations are done. I can't see what can be done to mitigate that fact.
If the pension capital grows above the rate of inflation, then yes there will be a charge, but it will be on the remainder once a BCE happens.

If you have NOT reached your LTA and are contributing to the pension (and have control over the contributions), then of course it is possible (government whim permitting) to ensure that you don't reach the limit. Is that your position? You seem to imply otherwise.

Ok, let us assume that your pension capital is just above the LTA and that you have enough that IHT will need to be paid.

When you trigger a BCE (ie start drawdown) the calculation will be made and will have to pay the "charge" due if you exceed the LTA.

You will be paying 20% income tax and 25% "charge", assuming your statement about ensuring basic rate tax.

The same if the BCE is caused by you reaching 75 or significantly changing your drawdown amount, if you were under the LTA when the previous BCE happened..

On your death IHT will be due (at 40%) on the portion of your estate above the IHT allowance. The remainder of your pension capital will have to pay a LTA charge at 55% (assuming that the LTA was exceeded), but no further tax will be due and it won't form part of their LTA..

*BCE benefit crystallisation event.

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Re: Should we drawdown our SIPPs?

#315425

Postby fca2019 » June 5th, 2020, 9:21 am

Hi there, if your pensions are above the LTA £1,073,100, then I would get/pay for advice on this as can afford it.

As you said generally better of using up the investments rather than pensions as rules at the moment favour passing on pensions in a tax efficient manner, especially if unfortunate to die before 75 and below LTA can be passed to your children tax free.

You said you don't want to gift to your children now. One option could be to gift to a bare trust in your name but designated to the child. This would count as a gift and if you live 7 years would not be part of your estate and no IHT payable on it. But you'd have control over it as trustee and you could keep the log in details to yourself. But as DOD says beneficiaries /kidsshould be grateful for what the get. Cheers

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Re: Should we drawdown our SIPPs?

#315427

Postby TUK020 » June 5th, 2020, 9:28 am

I have been working through a similar set of considerations, although my youngsters have yet to fledge off.

I am trying to plan out my wealth, expenditure, income/tax, and assistance for the youngsters in a way that does not 'tightly couple' things unnecessarily.

I am planning to draw on the SIPP in a way that manages my tax band - i.e just stay within the lower rate, and hopefully leave the rest to snowball as a reserve, and later as an efficient way to passing on assets outside of my estate. As I get closer to 75, I will review this strategy.

I am planning to downsize - surplus from this and the ISA should then provide sufficient cushion.

The big issue is that the thing the youngsters will most need help with is getting on the property ladder. This is likely to be an obstacle way before I hit 75.

I am currently funding a S&S LISA for each of them every year as the basis of building a deposit for when they eventually buy their own place. Fortunately I can fund this out of cashflow; otherwise I might be considering remortgaging to pay for this. This would reduce our assets in the event of our death, but moves the wealth into a timescale of more use to the youngsters, and in a way that neatly sidesteps the taxman.

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Re: Should we drawdown our SIPPs?

#315437

Postby ursaminortaur » June 5th, 2020, 10:10 am

hiriskpaul wrote:
Lootman wrote:I do not have a SIPP. But with that caveat it is my belief that the structures that work best for tax relief while you are alive (ISAs, SIPPs, primary residences) are absolutely the worst assets to own from an IHT perspective. it's like you spend a lifetime mitigating tax only to have the government mug 40% of the value when you die.

So I believe that you reach a point in your life where and when you cash out these tax-advantaged structures and instead divert the funds to a vehicle that is far more flexible. IHT is a tax on the unprepared.

We are where we are. I cannot go back and change what capital we have built in SIPPs and ISAs, but I can choose what assets that go in them and what order to draw down. I have looked at trusts and putting assets offshore, but there are serious drawbacks with all such schemes unless you don't mind trying tax evasion.

Not drawing the SIPP looks like 40% is lost in tax on the amount over the LTA before my beneficiaries receive the money, assuming beneficiaries pay 20% tax on withdrawal. Drawing it means 52% is lost. A 40% loss still means my beneficiaries are up on the deal as I got more tax and NI relief than that by paying into the SIPP.


In your original post you say you don't want to sell your house or liquidate your other non-pension assets and give them to your children at the moment but does that rule out all gifts to the children ?

For instance would you be OK with drawing down enough from the pension to keep you below the LTA threshold so avoiding the LTA excess charge at 75 and then gifting that to your children ? There are two ways of doing this

1) Drawdown large amounts (possibly over a few years) and make PET gifts which would avoid IHT seven years after the gift was made.
2) Drawdown smaller amounts regularly and since pension payments are income gift them to your children as gifts out of excess income
In order for these gifts to avoid IHT you just need to establish a regular pattern of giving (keeping some documentation of the gifting). This avoids gambling on surviving seven years.

https://www.thisismoney.co.uk/money/pensions/article-5753831/How-avoid-inheritance-tax-giving-away-money-surplus-income.html

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Re: Should we drawdown our SIPPs?

#315447

Postby vrdiver » June 5th, 2020, 10:32 am

hiriskpaul wrote:Our beneficiaries could then draw the remaining £75 and pay £15 of basic rate tax, leaving £60 from the original £100, instead of the £48 if we draw down and pay basic rate tax (and eventually IHT). That's 25% more after tax cash.

AIUI your beneficiaries would pay tax* on drawdown (of your SIPP) at their own marginal rate, which may or may not be BRT to start with, and could quickly get into HRT once they start taking the money.

Would that change in assumption have any impact on your logic?

VRD

*assumes you survive to age 75 or more

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Re: Should we drawdown our SIPPs?

#315477

Postby hiriskpaul » June 5th, 2020, 11:20 am

Urbandreamer wrote:
hiriskpaul wrote:At the moment we are planning to only draw enough to fill up our basic rate tax bands, after all our other taxable income has been taken into consideration. This is likely to mean paying the LTA excess charge when we reach 75, so we are in excess charge territory as well as IHT territory.


I'm not sure that I follow you. The LTA is now linked to inflation. It is also an "allowance" of how much can be removed from a pension.

If we assume a pension only just below the LTA today and grows at the same rate as inflation, then there will never be tax to pay.
If you are currently above the LTA, then you will start to pay when the calculations are done. I can't see what can be done to mitigate that fact.
If the pension capital grows above the rate of inflation, then yes there will be a charge, but it will be on the remainder once a BCE happens.

If you have NOT reached your LTA and are contributing to the pension (and have control over the contributions), then of course it is possible (government whim permitting) to ensure that you don't reach the limit. Is that your position? You seem to imply otherwise.

Ok, let us assume that your pension capital is just above the LTA and that you have enough that IHT will need to be paid.

When you trigger a BCE (ie start drawdown) the calculation will be made and will have to pay the "charge" due if you exceed the LTA.

You will be paying 20% income tax and 25% "charge", assuming your statement about ensuring basic rate tax.

The same if the BCE is caused by you reaching 75 or significantly changing your drawdown amount, if you were under the LTA when the previous BCE happened..

On your death IHT will be due (at 40%) on the portion of your estate above the IHT allowance. The remainder of your pension capital will have to pay a LTA charge at 55% (assuming that the LTA was exceeded), but no further tax will be due and it won't form part of their LTA..

*BCE benefit crystallisation event.

We both have fixed protection 2012, which fixed our LTAs at £1.8m. Inflation would need to be quite high to take the current LTA above our fixed LTAs by the time we are 75 and this looks unlikely. We fully crystallised a few years ago, but did not exceed the LTA at the time. Since then investment returns have been high and we have avoided drawing where doing so would mean the drawings being taxed at 40%. The combination of growth and relatively low drawing has resulted in the SIPPs growing to the extent that it is highly likely we will have to pay a charge at the age 75 BCE, even if we do draw down at basic rate.

The growth has already put us in line for the charge, even if we managed to draw future growth. Modest growth projections and the assumption that the basic rate band goes up only with inflation indicate the amount above the LTA is likely to rise. Drawing above basic rate does not make much sense at all and we will not be doing that. Each £100 would result in only £36 to beneficiaries if we pay 40% income tax on that £100.

There is little we can do to mitigate paying an LTA charge at age 75. I am reconciled with that. But calculations indicate that it would be better for our beneficiaries if we opted to pay a higher LTA charge by drawing less from our SIPPs, even if those drawings can be done at basic rate tax. This is counterintuitive, but it is how the maths works out.

There is no BCE on death by the way, not yet anyway. If there was, that would affect the calculations.

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Re: Should we drawdown our SIPPs?

#315489

Postby hiriskpaul » June 5th, 2020, 11:37 am

ursaminortaur wrote:
hiriskpaul wrote:
Lootman wrote:I do not have a SIPP. But with that caveat it is my belief that the structures that work best for tax relief while you are alive (ISAs, SIPPs, primary residences) are absolutely the worst assets to own from an IHT perspective. it's like you spend a lifetime mitigating tax only to have the government mug 40% of the value when you die.

So I believe that you reach a point in your life where and when you cash out these tax-advantaged structures and instead divert the funds to a vehicle that is far more flexible. IHT is a tax on the unprepared.

We are where we are. I cannot go back and change what capital we have built in SIPPs and ISAs, but I can choose what assets that go in them and what order to draw down. I have looked at trusts and putting assets offshore, but there are serious drawbacks with all such schemes unless you don't mind trying tax evasion.

Not drawing the SIPP looks like 40% is lost in tax on the amount over the LTA before my beneficiaries receive the money, assuming beneficiaries pay 20% tax on withdrawal. Drawing it means 52% is lost. A 40% loss still means my beneficiaries are up on the deal as I got more tax and NI relief than that by paying into the SIPP.


In your original post you say you don't want to sell your house or liquidate your other non-pension assets and give them to your children at the moment but does that rule out all gifts to the children ?

For instance would you be OK with drawing down enough from the pension to keep you below the LTA threshold so avoiding the LTA excess charge at 75 and then gifting that to your children ? There are two ways of doing this

1) Drawdown large amounts (possibly over a few years) and make PET gifts which would avoid IHT seven years after the gift was made.
2) Drawdown smaller amounts regularly and since pension payments are income gift them to your children as gifts out of excess income
In order for these gifts to avoid IHT you just need to establish a regular pattern of giving (keeping some documentation of the gifting). This avoids gambling on surviving seven years.

https://www.thisismoney.co.uk/money/pensions/article-5753831/How-avoid-inheritance-tax-giving-away-money-surplus-income.html

We have already made gifts to the children and will do more. It is just that it is hard to live how and where we want to and get our estate value below £1m including property. We could do it by moving somewhere where house prices are lower or maybe through financial engineering such as lifetime mortgages, but we don't really want to do either of those things. I am not out to save every penny in IHT if that impinges on our lifestyle, but we have more than we need so will give more away.

You make a good point about gifts from income. Drawing from SIPPS would provide a higher income in the eyes of HMRC than drawing from existing savings, investments and ISAs, so more could possibly be distributed within the gifts from income regime. Potentially a benefit of pension drawdown.

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Re: Should we drawdown our SIPPs?

#315490

Postby hiriskpaul » June 5th, 2020, 11:40 am

vrdiver wrote:
hiriskpaul wrote:Our beneficiaries could then draw the remaining £75 and pay £15 of basic rate tax, leaving £60 from the original £100, instead of the £48 if we draw down and pay basic rate tax (and eventually IHT). That's 25% more after tax cash.

AIUI your beneficiaries would pay tax* on drawdown (of your SIPP) at their own marginal rate, which may or may not be BRT to start with, and could quickly get into HRT once they start taking the money.

Would that change in assumption have any impact on your logic?

VRD

*assumes you survive to age 75 or more

Yes it would. Every £100 in the SIPP is worth £60 to beneficiaries if drawn after LTA charge and basic rate tax, but only £45 at 40% income tax.

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Re: Should we drawdown our SIPPs?

#315497

Postby hiriskpaul » June 5th, 2020, 11:49 am

TUK020 wrote:I have been working through a similar set of considerations, although my youngsters have yet to fledge off.

I am trying to plan out my wealth, expenditure, income/tax, and assistance for the youngsters in a way that does not 'tightly couple' things unnecessarily.

I am planning to draw on the SIPP in a way that manages my tax band - i.e just stay within the lower rate, and hopefully leave the rest to snowball as a reserve, and later as an efficient way to passing on assets outside of my estate. As I get closer to 75, I will review this strategy.

I am planning to downsize - surplus from this and the ISA should then provide sufficient cushion.

The big issue is that the thing the youngsters will most need help with is getting on the property ladder. This is likely to be an obstacle way before I hit 75.

I am currently funding a S&S LISA for each of them every year as the basis of building a deposit for when they eventually buy their own place. Fortunately I can fund this out of cashflow; otherwise I might be considering remortgaging to pay for this. This would reduce our assets in the event of our death, but moves the wealth into a timescale of more use to the youngsters, and in a way that neatly sidesteps the taxman.

I completely agree about getting assets out of our estate to the children as early as possible. That mitigates IHT and having the money early is more beneficial to them than having it later, provided they are sensible with it. Thankfully ours are sensible with money. We have been adding to their ISAs since they were 18 and LISAs since they started. One child on the property ladder, the other 2 not as it is unclear where they will end up living for more than a couple of years ahead at present.

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Re: Should we drawdown our SIPPs?

#315518

Postby xxd09 » June 5th, 2020, 12:26 pm

A house in their own name would be a minimum for all the kids -if funds allow
A very stabilising asset for a child after a good education
I am reminded of the 3minimums for a person to survive-a job ,a partner and an address
xxd09


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