Pension Planning Dilemma
Hi All
I have a client that has £23k net of guaranteed income from various pension arrangements and he wants to achieve £30k. (the £30k net will be achieved in 10 years time when his wife recieves her State Pension)
I should say that the client is 65 and is concerned about IHT.
One of the DB schemes he has the option of transferring the AVC of £99k to the DB scheme to take as tax free cash, which would easily support the income deficit over the 10 years, however it would immediatly form part of his estate for IHT purposes.
The other option is for us to start taking benefits from the wifes pension to make up the difference, she is not earning anything and therefore taking £7k will not be taxed. We could then just place the AVC is a personal pension meaning it will be outside of the estate for IHT purposes.
It concerns me that the latter method is moving tax free money to an environment where only 25% of it would be tax free, I dont know how compliance or the regulator would view this?
I personally think that we should take the AVC as tax free cash and use it to subsidise the income.
I have considered the fact that he could be storing up a LTA issue bu retaining the AVC ( he has anothe pot of £70k as well) but unlikely based upon 44% being used to date.
Any thoughts would be greatly appreciated.
Nathan
I have a client that has £23k net of guaranteed income from various pension arrangements and he wants to achieve £30k. (the £30k net will be achieved in 10 years time when his wife recieves her State Pension)
I should say that the client is 65 and is concerned about IHT.
One of the DB schemes he has the option of transferring the AVC of £99k to the DB scheme to take as tax free cash, which would easily support the income deficit over the 10 years, however it would immediatly form part of his estate for IHT purposes.
The other option is for us to start taking benefits from the wifes pension to make up the difference, she is not earning anything and therefore taking £7k will not be taxed. We could then just place the AVC is a personal pension meaning it will be outside of the estate for IHT purposes.
It concerns me that the latter method is moving tax free money to an environment where only 25% of it would be tax free, I dont know how compliance or the regulator would view this?
I personally think that we should take the AVC as tax free cash and use it to subsidise the income.
I have considered the fact that he could be storing up a LTA issue bu retaining the AVC ( he has anothe pot of £70k as well) but unlikely based upon 44% being used to date.
Any thoughts would be greatly appreciated.
Nathan
Comments
I hope my understanding of this is correct.
If you adopt scenario a) and bring the FSAVC into his estate. £70,000 of it will be spent over the next 10 years (not allowing for any increase in expenditure) and the balance could be paid away using his annual gifting allowance so that in 10 years time, the money will either have been spent or gifted outside of his estate. This leaves his wife's pension intact, outside her estate.
If you go for scenario b) then surely she would only be crystallising as much as was required each year (£7,000). This should be taken as UFPLS with no tax paid on the amount withdrawn as its within her Personal Allowance (so not 25% tax free but 100% tax free). Her remaining fund would be outside of her estate.
If he died within 10 years then scenario a) would have brought funds into his estate that didn't need to be there. Scenario b) would avoid this eventuality by only bringing in as much as is needed each year. Another disadvantage of scenario a) would be that any vehicle that the excess was saved into would not be as tax efficient as his FSAVC. Paying it into a new pension may well fall foul of recycling rules.
Andy
I think I'd want more information but here is one option for maximising tax efficiency.
If she has no earnings she could transfer her personal allowance, which would leave her with a personal allowance of £9,900. If she crystallises £9,900, as UFPLS or Phased FAD, this meets the income need of £7k with no tax paid. An investment of £2,880 can go straight back into her pension and get grossed up to £3,600. (you could, if the fund is sufficient, fully utilise her PA with a withdrawal of £13,200 and use pension and ISA allowances).
I don't think I have enough information on his DB situation, but the above, depending on the value of her pension, would avoid the need to access his AVC.