TRANSCRIPT 🔗
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Hello and welcome back to Financial Illumination, a podcast brought to you by Lumin Wealth.
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I'm very excited to be joined by my colleague Israel Babatunde. How are you doing, Israel?
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I'm doing well, James. How are you?
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I'm very good, thank you. You're debuting on the podcast today. How are you doing?
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Yes, yes. Feeling very, very good. It's my first time in the London office as well, so
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yeah, very exciting.
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It's great. It's a nice office, isn't it? Not as good as our office over in the Rente,
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but they couldn't be better than us.
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No, no, definitely not.
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Today we're going to be talking about an interesting topic. We're going to be talking about the
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changes coming up with pensions and inheritance tax. Obviously, it's been quite a big news.
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I think it should have been even bigger news, actually. I think there was a lot of news
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more about Jeremy Clarkson and farmers and agricultural relief, but actually this is
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affecting I think so many more people. So yeah, so I think that's the... Do you want
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to just give us a sort of a basic overview of what was announced?
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Yeah, like you said, James, really big changes in relation to pensions and how they fit into
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the inheritance tax regime. So as you guys have mentioned before, previously, well up
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until now, pensions are not included in the inheritance tax regime. Coming 6th of April
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2027, pensions will now be included and that's basically any lump sum that you get from a
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pension. There's about 4% of the states currently paying inheritance tax. And from
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April 2027, that's going to shoot up to about 10%. Yeah, so that's nearly double of the
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states that would now be paying inheritance tax. And I think one of the key things to
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note, because obviously we had the initial announcement of the budget and then we had
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the finance consultation. And I think one of the most important things that people really
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haven't been talking about is the change from who basically handles the inheritance tax.
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So initially, in the budget, when it was first announced, the pension administrators
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were basically responsible for basically paying the inheritance tax. And then the finance
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consultation came in and basically there is now flexibility on who can pay the inheritance
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tax. So it can be paid, the beneficiaries can instruct the pension scheme administrators
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to pay it. The beneficiaries could pay it themselves or from the estate of the deceased
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person. So I think that's really important, the flexibility around how that can be paid
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because I can imagine most people wouldn't want to trust the pension administrators to
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pay that inheritance tax, probably in a timely manner with everything, with what is probably
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going to be a challenging time. Yeah, absolutely. I know it caused a lot of fuss as well when
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it was announced because suddenly pension providers never had to deal with this before.
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So you just feel sorry for these poor pension providers. But no, it was always, when you're
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dealing with inheritance tax, and obviously in our job you end up dealing with it quite a lot,
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helping people. And if people have gone through it in their personal life, they'll understand
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that the whole process. But normally, as an executor, you're there dealing with it, you
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typically use a solicitor to deal with the probate. And the solicitor would add everything up in the
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value and then it's up to them to sort of to go ahead and make that payment. Yeah, now it's going
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to be a little bit bizarre with the pensions coming in. But yeah, this is just different. And I know
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it was a lot of consternation about what does this mean?
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Yeah, I mean, for most people, it will mean a significant increase in their inheritance tax bill.
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Obviously, for us as financial planners, it's an opportunity to implement solutions and
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strategies and solve problems for our clients. Should we talk a little bit about potential
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solutions that people with pension driven IHC liabilities could potentially use?
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Yeah, let's do that. So I think that's really important. And because at the moment, and
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especially when the rules were announced, there was a lot of people suddenly saying, Oh, well,
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should I take out my tax free cash? Maybe someone's only just turned 55, only just got access to it.
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Yeah. And they suddenly want to take out the tax free cash because they're worried, you know,
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Load full transcript
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the government's going to take it away. Suddenly, you're going to die and lose 40% of it. And so,
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yeah, so we just have to sort of say, well, hold on, calm down. You know, I think the big thing
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with this is yes, this rule is coming in April 2027. But pension rules change all the time.
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Sure. They change all the time. So as much as it might come in April 2027, if someone goes and
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makes huge, massive changes, well, then in three years time, you know, there might be a new government
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in place, they might switch them back again. Yes, absolutely. So I mean, that's, I suppose,
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the sort of the underlying kind of, you know, consideration. But do you want to just talk
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through some of the key opportunities? Definitely. Yeah, sure. So I'd say probably in the first
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instance, just spend the money, I'd say would probably be the first thing I'd probably be saying
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to clients to do. Not everyone is in inheritance tax conscious as well. You know, some people have
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no problem paying that and that's okay. But for people that are in inheritance tax conscious,
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I would say probably the first thing you want to be looking to is spend it. You've been talking a
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lot about the book you've been reading. I don't know if you want to give them free promo.
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Free publicity, but I would say, right. Yeah, absolutely. Yeah, number one thing would be to spend it
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and then gifting it, of course, as well. Gifting, whether that's out of normal expenditure or gifting
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outright to an individual or into an absolute trust or discretionary trust. If you wanted to
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maintain some sort of control over the utility of the funds, trust are really, really good for that.
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Protection, of course, you could you could ensure the inheritance tax risk essentially,
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with a whole of life policy. Only thing is, if you wanted to, if you wanted your beneficiaries
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to kind of enjoy the money whilst you're still alive, obviously, protection is not a suitable,
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wouldn't be a suitable solution that would be more for gifting. So yeah, I'd say probably,
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like I said, number one, spend the money. Number two, try and try and gift it. And obviously,
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we could talk a little bit about the rules surrounding gifting and the seven year clock
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inheritance. I mean, protection as well, you could protect it.
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Those are the key things that affect most people. I think the tricky thing, like so,
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like we were saying with with, you know, people with big sums in pensions. And so I've had a
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couple of scenarios where, okay, maybe someone was only drawing up, you know, they only needed a
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thousand pound a month from their pension on top of their other income. So they were just drawing
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a thousand pound a month. And that was fine. But then now we're looking at it and thinking, well,
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hold on a minute, if I'm just going to leave this money in the pension, and it's going to grow and
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grow and grow, if I'm only drawing a thousand pound a month, say it's 400,000, well, it's going
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to grow by more than 12 grand a year, hopefully, isn't it? A decent enough return. So actually,
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what we've been more thinking about now is, you know, well, should we be then drawing more
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around the pension, maybe even going up to a 40%, you know, the point of where 40% tax kicks in.
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And then either, yeah, I said, try and spend the money. That's number one priority. Great,
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you can spend it, enjoy your life, fantastic. Or if not, then actually just gifting that,
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you know, trying to gift it through to the children, or if you don't want them to have it,
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then you could gift it, like I said, into trust. But it's just that case of, you know, if you can
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at least get hold of it only incurring 20%, and then that fund can then grow somewhere else,
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like in the children's name, you're gifting them to their pensions or their Isis, something like
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that, then at least it's growing in their name. And then so in 10 years time, instead of it growing
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in your pension, and all of them being taxed at 40%, it can be growing in their name, and it's
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had a significant upload. So sometimes, yeah, incurring that 20% tax initially is better for
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the longer term. Yeah, and like you rightly mentioned earlier as well, the kind of sort of
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generic textbook order of contribution, order of withdrawal, has basically been changed now,
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isn't it? Like with pensions, it was usually pensions first, pensions last, because
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they had that inheritance tax exemption. And now obviously, that's completely flipped on its head.
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And also for
people over the age of 75, that pass away and leave their pension,
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it's basically double taxation, like a client put it to us, double dipping, you know,
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income tax and inheritance tax, which would basically mean if a beneficiary was to,
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a beneficiary pay in 40% was to inherit a pension that also had an inheritance tax of 40%,
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the effective tax rate is actually 64%. That's crazy. Yeah. So I mean, we'll, you know,
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we'll have to see right now. Right now, it hasn't come in yet. Yes. So we're sort of planning for it.
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And then we'll see what happens, you know, whether it's the government changes their mind,
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whether there's a different government comes in and changes it. But yeah, right now you're
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thinking, wow, that is, that is very strong tax. And so often what we're doing is just looking at,
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you know, looking at ways of maximising, you know, the benefit, looking at ways of sort of,
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you know, basically passing on as much as you can to the people that you want to, not to,
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not to the attention, if you don't want to, like I said, some people are happy to,
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you know, the schools, it pays for the roads, it pays for everything else. So if you're happy
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to pay taxes, absolutely fine. What we're saying is that maybe you don't have to do that. You know,
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you do have options, there's options available to you to do other things.
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Absolutely. I think we could speak a little bit about people that are inheritance tax conscious,
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worried about the effect on pensions coming into the inheritance tax regime, what that would have
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on their estate, but they still had, they still required some sort of need from for income from
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their pension. So they're basically in the middle, right? So they still require some sort of access
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to their pension to live, obviously, to fund their retirement, but also are inheritors tax conscious.
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Is that, are there any solutions? Yeah, I mean, it's just the case of looking at all the options
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available to you, you know, so is there a chunk of money in Isis or in commercial property or,
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you know, rented properties and things like that, that maybe could be sold and gifted, you know,
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there are, there's, or like you said, protection. So, so a lot of people, maybe they don't want to
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gift, they don't want to downsize their property, they don't want to hand over chunks of money to
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their children or because it's their money, they want to keep it, that's in their name, and that's
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absolutely fine. But they hate the idea of, you know, 400,000 or a million pounds or whatever it
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is going to HMRC. And so, so yeah, in that instance, I think that's where the, like you said,
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that protection side can work really well, because, you know, if the, if the inheritance tax bill is
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going to be 300,000, then you take out a policy to cover 300,000, then, then yes, you are effectively
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paying it in your lifetime, you know, you're paying, you're going to be paying those premiums for the
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rest of your life, but if you can afford that through your normal spending, then actually it's
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not going to be the same significant impact of suddenly your children having to find 300,000
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pounds when you're gone. Another option I know people have looked at quite a bit, I know you're
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a fan of Israel's discounted gift trust. Absolutely. Can you talk us through that? Yeah, yeah, sure. So
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a discounted gift trust, it's an arrangement where a settler, so the person, the donor, would make a
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gift into a trust whilst retaining a right to the original capital, right? So for simple numbers,
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say you wanted to put 200,000 pounds in a trust from your pension, so you took 200,000 hours,
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usually it will be your tax-free cash, because you don't want your tax-free cash to get,
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to have that tax levied on it, so you take your tax-free cash out of the pension, put that into a
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discounted gift trust, and you retain a right to the capital over 20 years with a maximum of 5%
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to be taken every year. So if you put 200,000 pounds in a discounted gift trust, you could take
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a maximum of 10,000 pounds out every year for the next 20 years with no immediate tax liability,
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what we call tax deferred. So it really is a very powerful solution for people, like I said,
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that are conscious about IHT liabilities and also still require some access to their money for income
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to fund their retirement. So yeah, I'd say just briefly, obviously we're not going to get into
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the nuts and bolts of a discounted gift trust, but yeah, essentially that's one solution that people
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could be speaking to their advisors about if they were concerned about IHT liability and also
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needed some sort of access to some income as well. That's really key because so many people that we
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talk to, the issue is no one knows how long they're going to live, and so therefore what they might
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need access to. So yeah, that can be a really good option to actually start that process,
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get some of the funds out of the estate, but then also still have that opportunity to get that income
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back to them. Because the thing with trust planning is you could do too much too early
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with gifting. I think clients have to be really conscious of their needs first and kind of
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overcompensate for what they think they might need before they kind of start going into any sort of
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gifting regimes. Well Israel, thank you so much for your time today. Thank you. And yeah, we will see
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you again very soon. Definitely. Thanks a lot, James. Thank you. Anything discussed in this podcast
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was generic information only and does not constitute financial advice.