IHT Planning Questions

[Lootman]

it has thrown up another (to my mind) anomaly or quirk in the system, which I'd be interested to hear the panel's view about.

There are four options for the pension fund:
1 - pay as a tax-free lump sum
2 - convert into a 'beneficiary income release' fund
3 - transfer to another scheme with another provider
4 - lifetime annuity

That's all fair enough but the 'quirk' is that for option 2 & 3 it is necessary to use an IFA. Thus, I am forced to pay for independent financial advice in order to take what seems to be the most prudent and responsible option, ie option 2, while not needing any independent advice to take the whole lot as a tax-free lump sum and blow it all on wine, women and song!

I appreciate that different circumstances could mean different choices but it's the regulatory inconsistency that seems odd to me. If people cannot be trusted to make their own financial decisions, why not require an IFA for ALL the options?

I have no idea what a 'beneficiary income release' fund is. But what seems to be the most prudent and responsible option for me is option 1. You do not need an IFA (and I agree that is a silly condition for any option). And you can then invest the lump sum for income if that is your aim.

To me the issue with these types of things is always to free yourself from the institutions, advisors and rules, and just have the cash in your hands!

[scrumpyjack]

Agree that option 1 is the best, don't let IFAs anywhere near it, and get it out tax free while you can.

The other point is that if you are trying to ensure you keep your estate value below the IHT limits, you could instruct the Pension Trustee to give some of it straight to your son, rather than have it go into your estate and then be potentially liable to IHT. The Trustee has absolute discretion. They will take the deceased's wishes into account but they can also take other factors into account, such as the wishes of the person the deceased wanted it to go to.

[genou]

t
There are four options for the pension fund:
1 - pay as a tax-free lump sum
2 - convert into a 'beneficiary income release' fund
3 - transfer to another scheme with another provider
4 - lifetime annuity

That would imply that death occurred under 75. Be aware that to preserve the tax free status of the funds you may have to act within a two year window.
Some discussion here : https://www.investcentre.co.uk/sites/de ... _rules.pdf

That's all fair enough but the 'quirk' is that for option 2 & 3 it is necessary to use an IFA.

Is this claimed to be a legal requirement, or it is merely the policy of the pension administrator?

[jdoe]

I have no idea what a 'beneficiary income release' fund is. But what seems to be the most prudent and responsible option for me is option 1. You do not need an IFA (and I agree that is a silly condition for any option). And you can then invest the lump sum for income if that is your aim.

To me the issue with these types of things is always to free yourself from the institutions, advisors and rules, and just have the cash in your hands!

With respect, if you have no idea what a 'beneficiary income release' fund is, how can you know that option 1 is the best choice? I know 'cash is king'

AIUI, beneficiary income release is essentially transferring the deceased's drawdown scheme into another name and continuing as before but with everything being tax-free plus there being no age restriction on when drawdown can begin.

I accept that a tax-free lump sum might be attractrive in some circumstances but as I'm already mortgage and debt free and have my own pension arrangements then I'm not in urgent need of a substantial 6-figure lump of cash . . . so I'd be looking to invest somewhere anyway, so why not just stick with the existing fund, which has performed perfectly adequately for the past few years? In this respect the deceased's pension scheme effective continues unchanged after death to the benefit of their spouse, unlike a DB pension that would typically reduce payments by 50%.

Besides, even if taking the cash option, wouldn't an IFA be required to set up another income realse/drawdown type fund?

Another interresting option is that I could pass some of the fund into my son's name to give him a decent pension fund and one that he could begin to drawdown at anytime, should he wish, as there is no need to be 55 with such a 'beneficiary' income release fund, or so I'm told.

Decisions, decisions . . .

[jdoe]

Agree that option 1 is the best, don't let IFAs anywhere near it, and get it out tax free while you can.

The other point is that if you are trying to ensure you keep your estate value below the IHT limits, you could instruct the Pension Trustee to give some of it straight to your son, rather than have it go into your estate and then be potentially liable to IHT. The Trustee has absolute discretion. They will take the deceased's wishes into account but they can also take other factors into account, such as the wishes of the person the deceased wanted it to go to.

My instinct is certainly to keep away from IFAs whenever possible, but the issue would then be what to do with a large amount of cash. With interest rates so low it would suggest another income release/drawdown type fund, which would no doubt require and IFA to set up anyway (I think). I know there's the option to self-manage investments, but I have no interest (or ability) to spend my retirement years on such a thing and am happy to just use a managed fund, which seems to have worked pretty well up until now.

You're right that there's the option to have some of the fund passed directly to my son, and that's something I'm seriously considering.

[jdoe]

There are four options for the pension fund:
1 - pay as a tax-free lump sum
2 - convert into a 'beneficiary income release' fund
3 - transfer to another scheme with another provider
4 - lifetime annuity

That would imply that death occurred under 75. Be aware that to preserve the tax free status of the funds you may have to act within a two year window.
Some discussion here : https://www.investcentre.co.uk/sites/de ... _rules.pdf

Yes, you're correct that death was under 75 and I'm aware of the two-year limit to make the relevant decisions, though I don't think that should be a problem in practice - but good to point it out.

That's all fair enough but the 'quirk' is that for option 2 & 3 it is necessary to use an IFA.

Is this claimed to be a legal requirement, or it is merely the policy of the pension administrator?

Good question, and I don't know for certain. The pension company is adamant that an IFA is required for option 2 and from the nature of the discussion it seemed like it was a regulatory issue that they were constrained by, but I get your point.

[scrumpyjack]

Agree that option 1 is the best, don't let IFAs anywhere near it, and get it out tax free while you can.

The other point is that if you are trying to ensure you keep your estate value below the IHT limits, you could instruct the Pension Trustee to give some of it straight to your son, rather than have it go into your estate and then be potentially liable to IHT. The Trustee has absolute discretion. They will take the deceased's wishes into account but they can also take other factors into account, such as the wishes of the person the deceased wanted it to go to.

My instinct is certainly to keep away from IFAs whenever possible, but the issue would then be what to do with a large amount of cash. With interest rates so low it would suggest another income release/drawdown type fund, which would no doubt require and IFA to set up anyway (I think). I know there's the option to self-manage investments, but I have no interest (or ability) to spend my retirement years on such a thing and am happy to just use a managed fund, which seems to have worked pretty well up until now.

You're right that there's the option to have some of the fund passed directly to my son, and that's something I'm seriously considering.

In that case you're probably best to go for something like the Vanguard Life Strategy fund and just leave it, rather than have an IFA charge you fees to do the same thing, and probably do it much worse. Less risky, IMO to do that, than be subject to the whims of whichever IFA you use.

[Lootman]

That's all fair enough but the 'quirk' is that for option 2 & 3 it is necessary to use an IFA.

Is this claimed to be a legal requirement, or it is merely the policy of the pension administrator?

Good question, and I don't know for certain. The pension company is adamant that an IFA is required for option 2 and from the nature of the discussion it seemed like it was a regulatory issue that they were constrained by, but I get your point.

The cynic in me thinks that is a policy imposed to try and deter you from moving your money away from this institution. They would always rather you kept the money with them.

I have no idea what a 'beneficiary income release' fund is. But what seems to be the most prudent and responsible option for me is option 1. You do not need an IFA (and I agree that is a silly condition for any option). And you can then invest the lump sum for income if that is your aim.

To me the issue with these types of things is always to free yourself from the institutions, advisors and rules, and just have the cash in your hands!

I accept that a tax-free lump sum might be attractive in some circumstances but as I'm already mortgage and debt free and have my own pension arrangements then I'm not in urgent need of a substantial 6-figure lump of cash . . . so I'd be looking to invest somewhere anyway, so why not just stick with the existing fund, which has performed perfectly adequately for the past few years? In this respect the deceased's pension scheme effective continues unchanged after death to the benefit of their spouse, unlike a DB pension that would typically reduce payments by 50%.

Besides, even if taking the cash option, wouldn't an IFA be required to set up another income realse/drawdown type fund?

Any pot of cash can be invested to provide a stream of income. So the decision of whether to let this institution invest for that income, or whether to do it yourself, is really a question about your own investment knowledge and confidence.

Personally I would always want the money in my account because, whether the fees are explicit or bundled, you will be paying fees to this entity, and something like Vanguard that somebody else suggested will probably be at least as good, and certainly cheaper.

As above they want to keep hold of your money and that is exactly why I would move it away by taking the tax-free lump sum. In my view you do not need an IFA for that and would in fact be better off not having one. Those fees again.

[jdoe]

Is this claimed to be a legal requirement, or it is merely the policy of the pension administrator?

Good question, and I don't know for certain. The pension company is adamant that an IFA is required for option 2 and from the nature of the discussion it seemed like it was a regulatory issue that they were constrained by, but I get your point.

The cynic in me thinks that is a policy imposed to try and deter you from moving your money away from this institution. They would always rather you kept the money with them.

I have no idea what a 'beneficiary income release' fund is. But what seems to be the most prudent and responsible option for me is option 1. You do not need an IFA (and I agree that is a silly condition for any option). And you can then invest the lump sum for income if that is your aim.

To me the issue with these types of things is always to free yourself from the institutions, advisors and rules, and just have the cash in your hands!

I accept that a tax-free lump sum might be attractive in some circumstances but as I'm already mortgage and debt free and have my own pension arrangements then I'm not in urgent need of a substantial 6-figure lump of cash . . . so I'd be looking to invest somewhere anyway, so why not just stick with the existing fund, which has performed perfectly adequately for the past few years? In this respect the deceased's pension scheme effective continues unchanged after death to the benefit of their spouse, unlike a DB pension that would typically reduce payments by 50%.

Besides, even if taking the cash option, wouldn't an IFA be required to set up another income realse/drawdown type fund?

Any pot of cash can be invested to provide a stream of income. So the decision of whether to let this institution invest for that income, or whether to do it yourself, is really a question about your own investment knowledge and confidence.

Personally I would always want the money in my account because, whether the fees are explicit or bundled, you will be paying fees to this entity, and something like Vanguard that somebody else suggested will probably be at least as good, and certainly cheaper.

As above they want to keep hold of your money and that is exactly why I would move it away by taking the tax-free lump sum. In my view you do not need an IFA for that and would in fact be better off not having one. Those fees again.

Thanks for the thoughts. I also tend towardsthe cynical when IFAs are concerned, though I'm sure they must have their place. I just don't like being forced to used them. Also, while our instincts might be to free ourselves from institutions, advisors and rules, which having 'cash in hand' would certainly achieve, there's quite a big downside to keeping such a large sum under the mattress where it will automatically lose 2-3% of it's value every year (at present and maybe more in future), so it's hard to see how to avoid institutions completely when looking for a reasonably safe place to invest.

I'm not entirely convinced it's the pension company imposing these IFA rules though. I certainly get that they would like to keep the money invested with them, in which case why insist on an IFA for the beneficiary income release option, which keeps the money with them? Also, they don't insist on an IFA for taking the cash option, or indeed to transfer to another pension company (though that company might well insist on an IFA). So again, it all seems a bit inconsistent.

Also, AIUI, the 'beneficiary income release' option is tax-free when drawing down. Always. Including any subsequent growth to the fund. Whereas, while the cash option is a tax-free lump sum, can that tax-free status transfer to a new investment fund? I don't know.

As for fund management fees, the standard fee is 1% but it would be discounted by 0.6% because of the size of the investment, so just 0.4% annually, which seems pretty good. Also, I'd be close to the 0.65% discount value so it might even reduce further assuming the plan grows.

[genou]

Also, AIUI, the 'beneficiary income release' option is tax-free when drawing down. Always. Including any subsequent growth to the fund. Whereas, while the cash option is a tax-free lump sum, can that tax-free status transfer to a new investment fund? I don't know.

Left in beneficiary drawdown it is outside IHT ( and remains there ad infinitum, subject to legislation changes ) . Income tax free for you on transfer is normal. On successors it only passes down IT free if the donor in each generation dies under 75. If you take the cash, there is no tax free status, and no succession.

As for fund management fees, the standard fee is 1% but it would be discounted by 0.6% because of the size of the investment, so just 0.4% annually, which seems pretty good. Also, I'd be close to the 0.65% discount value so it might even reduce further assuming the plan grows.

I'd ask if those fees are above the underlying fund fees. The answer is almost certainly going to be yes. In which case you are being stiffed. No wonder they demand you have to pay an IFA to leave. Which is probably cheaper in the long run. Push hard for why you have to pay to leave.

[jdoe]

As for fund management fees, the standard fee is 1% but it would be discounted by 0.6% because of the size of the investment, so just 0.4% annually, which seems pretty good. Also, I'd be close to the 0.65% discount value so it might even reduce further assuming the plan grows.

I'd ask if those fees are above the underlying fund fees. The answer is almost certainly going to be yes. In which case you are being stiffed. No wonder they demand you have to pay an IFA to leave. Which is probably cheaper in the long run. Push hard for why you have to pay to leave.

Agree the total fees need more confirmation. These are the details I'm working from so far: https://adviser.royallondon.com/globala ... atures.pdf

But it's not that I have to pay an IFA to leave, it's that (apparently) I have to pay and IFA to stay with them and continue the existing drawdown fund. I can choose to take the cash (or buy an annuity - yeah, right) without using an IFA.

When we transferred two DB pensions into this drawdown pension some years ago we had to use an IFA and in addition to the fee for the transfer they wanted an annual 1% fee for on-going management, on top of the fund management cost. When asked what benefit they would bring to an already managed fund they didn't have a convincing answer so we refused to sign up for their on-going fee, leaving just the fund management fee. They were most put out by this!

It's a minefield!

[genou]

Agree the total fees need more confirmation. These are the details I'm working from so far: https://adviser.royallondon.com/globala ... atures.pdf

But it's not that I have to pay an IFA to leave, it's that (apparently) I have to pay and IFA to stay with them and continue the existing drawdown fund. I can choose to take the cash (or buy an annuity - yeah, right) without using an IFA.

I think they are trying it on. Here https://www.royallondon.com/existing-cu ... r-pension/ they seem to accept that you can move unadvised. I'd contact one of the usual suspects - AJBell or Hargreaves and ask them whether they will take a Royal London DC pension unadvised. I think they will, and if you initiate a pull from another provider I don't see what RL can do other than comply.

I can't comment on early termination fees, which they seem to have, since that may be specific to your circumstances.

I haven't read documentation like this in years. It is all "where are the customers' yachts" territory.

[jdoe]

That document is a bit confusing. As you say, they seem to accept moving pensions unadvised but then mention such moves would be through an IFA.

Also, I suspect mine is a slightly different case as it's not really a pension plan as such now that the owner is deceased. It's really just a pot of money being inherited and since I already have my own pensions I can't see how decisions about what to do with this inheritance can represent a financial risk to me personally, so why the need for an IFA?

Sure, there will be good and bad things I could do with it but fundamentally I can't become worse off than I was without it. Indeed, they've already confirmed I can take it all as a tax-free cash lump and do as I wish with it (how about a trip to space with Virgin Galactic for example ), so it seems mad that I need an IFA just to keep the money invested where it already is and where I can easily access it by drawdowns as and when required.

I think I need to push them a bit more on all of this. Thanks for the comments and suggestions.

[swill453]

Sure, there will be good and bad things I could do with it but fundamentally I can't become worse off than I was without it. Indeed, they've already confirmed I can take it all as a tax-free cash lump and do as I wish with it (how about a trip to space with Virgin Galactic for example ), so it seems mad that I need an IFA just to keep the money invested where it already is and where I can easily access it by drawdowns as and when required.

Royal London is an insurance company. My finances became significantly better once I decided the best strategy was to extract everything I had from control of such as quickly as possible.

If I had the option of taking the entire lump sum, tax free, from under the auspices of an insurance company I would grab it at the first opportunity.

That's just me, though

Scott.

[jdoe]

That's fair comment, but what would you then do with such a lump sum?

I've no real interest in becoming my own investement manager in my retirement years as I have many better things to do.

Plus, to be fair to RL, their performance has been perfectly adequate for my needs since using them. I've little doubt it would be possible to improve on their returns, but at what cost to my own time, effort and sanity?

I'm no longer in the game of trying to squeeze every possible penny out of my investments, I just want an easy life with 'enough' to comfortably live on. I appreciate 'enough' is very subjective but I've known many people who have blindly pursued money at the expense (in my view) of their quality of life (another very subjective thing of course).

[swill453]

That's fair comment, but what would you then do with such a lump sum?

Well speaking for myself, I'd stick the lot in the VWRL world tracker ETF. Relatively low yield, so income tax easy to manage (for me). I'd feed as much as possible into ISAs, and otherwise mitigate capital gains tax by swapping to a different world tracker as necessary.

Obviously I can't speak for anyone else's circumstances.

Scott.

[scrumpyjack]

That's fair comment, but what would you then do with such a lump sum?

Well speaking for myself, I'd stick the lot in the VWRL world tracker ETF. Relatively low yield, so income tax easy to manage (for me). I'd feed as much as possible into ISAs, and otherwise mitigate capital gains tax by swapping to a different world tracker as necessary.

Obviously I can't speak for anyone else's circumstances.

Scott.

Yes I completely agree with that. But I would be careful which broker/platform I went with as VWRL is US$ and some platforms have mandatory currency conversion and high conversion charges. HL, for example, will automatically convert the divis into GBP, taking their cut, rather than let you roll them up in US$.

[jdoe]

OK, reviving this thread as I've still not fully decided what to do, but I want to sort things out this side of Christmas.

I was leaning towards just taking the tax-free lump sum, for many of the reasons previously suggested, but am now thinking about the potential IHT implications.

I'm already a little over the £1m total IHT allowance so if I take the tax-free lump sum it will all become part of my taxable estate, whereas if I transfer it into another pension fund it would remain outside of my estate (under the current rules, but who knows how they might change?!).

It's looking like I'll need to pay an IFA to transfer it into a new fund in my name but that's likely to be a lot less than the potential IHT liability if I take it all as tax-free cash.

Of course, the intention is to spend it all anyway, leaving as little as possible in my estate, but things don't always go to plan and there might be the proverbial bus waiting for me down the line - which seems to be the biggest challenge when planning for things like pensions and IHT!

Just one question though - does anyone know the tax situation of effectively transferring a tax-free lump sum into a new drawdown pension fund? ie, could I drawdown the entire fund tax-free or would it work like a 'normal' pension, ie 25% tax-free and 75% taxable at my marginal rate?

[swill453]

Just one question though - does anyone know the tax situation of effectively transferring a tax-free lump sum into a new drawdown pension fund? ie, could I drawdown the entire fund tax-free or would it work like a 'normal' pension, ie 25% tax-free and 75% taxable at my marginal rate?

But you're not going to put it in a pension fund are you? Surely it'll just be an investment in (something). Sometimes called a GIA (General Investment Account).

You can spend from this at will with no further tax to pay.

Even better if you can put some or all of it in an ISA so growth is tax free.

(And I don't see anything in what you're doing that requires an IFA. DIY! Admittedly I haven't gone back and read the whole thread so sorry if I missed something.)

Scott.

[Dod101]

OK, reviving this thread as I've still not fully decided what to do, but I want to sort things out this side of Christmas.

I was leaning towards just taking the tax-free lump sum, for many of the reasons previously suggested, but am now thinking about the potential IHT implications.

I'm already a little over the £1m total IHT allowance so if I take the tax-free lump sum it will all become part of my taxable estate, whereas if I transfer it into another pension fund it would remain outside of my estate (under the current rules, but who knows how they might change?!).

It's looking like I'll need to pay an IFA to transfer it into a new fund in my name but that's likely to be a lot less than the potential IHT liability if I take it all as tax-free cash.

Of course, the intention is to spend it all anyway, leaving as little as possible in my estate, but things don't always go to plan and there might be the proverbial bus waiting for me down the line - which seems to be the biggest challenge when planning for things like pensions and IHT!

Just one question though - does anyone know the tax situation of effectively transferring a tax-free lump sum into a new drawdown pension fund? ie, could I drawdown the entire fund tax-free or would it work like a 'normal' pension, ie 25% tax-free and 75% taxable at my marginal rate?

Can the pension proceeds not be transferred into a SIPP in your name? You do not need to worry about the investment side because there are several straightforward passive funds already mentioned. These require no maintenance. I am going through an exercise at the moment re IHT and if I were you I would try to keep the funds outside of your estate. I do not think that SIPP rules will ever be changed in that respect to make them form part of your estate. A SIPP gives you great flexibility to take some funds tax free, drawdown or not to suit you and crucially they have the ability to allow you to pass on the SIPP to one or more named beneficiaries (by means of a Letter of Wishes to the Trustees) outside of your estate and thus IHT free. I think if you are transferring from one pension regime to another no one can oblige you to take IFA advice. I am not certain of that but I would challenge anyone who told you otherwise, (especially the current pension fund trustees) And a SIPP is another pension fund. If it is a substantial fund then you might want in any case to run all of this past an IFA to answer your questions, but make it clear that you are looking for 'one off' advice only.

I am jumping in very late but it was the title of the thread that made me read the thread because as I say I am going through this exercise at the moment and what I have written may al;ready have been covered or may be a nonsense and if so just ignore it.

Dod