DB Pension or Annuity and IHT Liability
DB Pension or Annuity and IHT Liability
Author
Discussion

SunsetZed

Original Poster:

2,678 posts

186 months

Yesterday (08:44)
quotequote all
Trying to get my head around how bringing pensions into the scope of IHT and hoping someone here can help without me having to trawl through the proposal.

If a couple (long term but unmarried) are both 55 and own (outright) a house value at 800k and one of them has a DB pension (or annuity bought with DC pension funds with no guarantee period) paying £30k per year with a survivors pension of 50% (£15k) how is the pension valued for IHT purposes? Same question applies if the person dies at 65 / 75 / 85 as the real value will have decreased so I assume the IHT liability will have too?

It seems to me like the value of the pension at the time of the person's death in this scenario really depends on the age of the person inheriting it but I don't know if that's factored in to the governments plan at all?

Edited by SunsetZed on Wednesday 27th August 10:18

NortonES2

450 posts

64 months

Yesterday (09:04)
quotequote all
I believe DB pensions annuities unlike a drawdown pension don't have a pension pot as such and there is no IHT due on them as in your case they will end when both you and your partner have passed away. There will be nothing to pass on to your beneficiaries.

SunsetZed

Original Poster:

2,678 posts

186 months

Yesterday (09:49)
quotequote all
You are largely correct however if you are not married then what goes to your partner is not exempt from income tax so I'd like to understand how the IHT liability is calculated in this scenario.

Edited by SunsetZed on Wednesday 27th August 09:56

alscar

6,702 posts

229 months

Yesterday (10:10)
quotequote all
If the partner is financially dependent on the DB holder then subject to their own scheme rules and whether the partner has been named as the beneficiary I believe they inherit per se as if they were married.
They would obviously then get the reduced quantum of DB pension pa but would be liable for income tax at their marginal rates just as if the original holder was.
No IHT when the holder dies as not leaving a pot as such and they are “ married “ as per above.

SunsetZed

Original Poster:

2,678 posts

186 months

Yesterday (10:18)
quotequote all
alscar said:
If the partner is financially dependent on the DB holder then subject to their own scheme rules and whether the partner has been named as the beneficiary I believe they inherit per se as if they were married.
They would obviously then get the reduced quantum of DB pension pa but would be liable for income tax at their marginal rates just as if the original holder was.
No IHT when the holder dies as not leaving a pot as such and they are “ married “ as per above.
Thanks so I'm clear that the DB pensions will have no liability. How about the same scenario (in terms of ages and amounts) but instead of it being a DB pension it's an annuity bought with DC pension funds.

alscar

6,702 posts

229 months

Yesterday (10:28)
quotequote all
I believe ( and I’m not 100% sure ) that providing the annuity has been set up by also naming the beneficiary ( maybe also as a joint life per se ) then the same applies.
But my advice would be to check with said annuity provider especially if any documents aren’t clear.

SunsetZed

Original Poster:

2,678 posts

186 months

Yesterday (10:32)
quotequote all
alscar said:
I believe ( and I’m not 100% sure ) that providing the annuity has been set up by also naming the beneficiary ( maybe also as a joint life per se ) then the same applies.
But my advice would be to check with said annuity provider especially if any documents aren’t clear.
Thanks, my googling suggested the same (that joint life annuities are out of scope of IHT) however none of the links were to a government source stating it.

alscar

6,702 posts

229 months

Yesterday (10:37)
quotequote all
Don’t give Rachel any more ideas !

leef44

5,002 posts

169 months

Yesterday (10:48)
quotequote all
I don't know the answer to this one but it would make sense that there is no IHT. Once the pension has been sold for an annuity then you've effectively switched to an insurance product. So on death an insurance policy pays out to the partner.

darreni

4,220 posts

286 months

Yesterday (11:25)
quotequote all
With DB schemes and annuities the pot/fund has been exchanged for an income for life and as such there is no residual pot/fund unlike a drawdown scheme.


Rufus Stone

10,596 posts

72 months

Yesterday (11:37)
quotequote all
The Government consultation and technical guidance issued in July states:

Joint Life Annuities

Joint life annuity products are principally designed for, but not limited to, couples. Where a member chooses to take a joint life annuity, it continues to be payable to the chosen survivor after the member’s death (usually at a reduced rate). If the chosen survivor was a spouse or civil partner the usual Inheritance Tax exemption would apply.

For unmarried couples and children, the rights of the survivor are separate from the rights of the member. The survivor’s rights (paid from a joint life annuity) are not part of the member’s estate and are not in scope of Inheritance Tax.

SunsetZed

Original Poster:

2,678 posts

186 months

Yesterday (12:40)
quotequote all
Rufus Stone said:
The Government consultation and technical guidance issued in July states:

Joint Life Annuities

Joint life annuity products are principally designed for, but not limited to, couples. Where a member chooses to take a joint life annuity, it continues to be payable to the chosen survivor after the member’s death (usually at a reduced rate). If the chosen survivor was a spouse or civil partner the usual Inheritance Tax exemption would apply.

For unmarried couples and children, the rights of the survivor are separate from the rights of the member. The survivor’s rights (paid from a joint life annuity) are not part of the member’s estate and are not in scope of Inheritance Tax.
Thanks that's very helpful.