I’m in the same situation as John I’m looking to retire earlier now pensions are part of IHT. I’m not married but have two kids which I was looking to leave some of it. It makes no sense for me to keep working longer to fill my pension. I’m not sure the government have realised many high skilled people will retire early.
I love the term extraction rate of tax ! I think this key, if it goes in at 40+% and you take out 25% tax free and only pay at 20% you are big winner. I think the biggest change as result of the budget is it will accelerate my gifting .
@@PrinciplesPersonalFinance Excellent video. Income drawdown from a DC pension - have HMRC given a definitive answer to whether this is considered income or capital for the purposes of gifts? I have seem some debate online that it may be considered capital and therefore cannot qualify for gifts out of income.
@@grahamwarrin3313 wouldn't the fact that it is taxed as income automatically mean it is classified as income. They surely (🤔) can't have it both ways?
@@n0_h4ndl3 You would think. But apparently taxing as income and actually classing as income can be different. I would support a class legal action to challenge this on pensions because how else are you to grow your pension pot if not by buying assets that you later sell to provide an income?
Happy Thanksgiving, Principles Personal Finance! This is an outstanding video. It is excellent to see you have over 20k subscribers and over 500 likes on it. It is a testament to your hard work and creativity!
somewhere between 800k - 1.3m by pension access age - that's the pot size that lets you take full advantage of the (now capped) 25% tax free amount at the lower end, and to keep it under the 40% tax band on withdrawals at the upper end. There are going to be increasing cases of people who only get standard relief on the way in but are taxed at the higher rate on withdrawals due to the stupid rules we have in place and the effects of tax drag
Food for thought, thanks The 25% tax-free amount is limited currently to £268,275 so would be exhausted in the 13th year if drawing down £67,000 a year
Very astute point. It doesn't impact the calcs here as it's factored into the lump sum, but you're absolutely right. I was going to do a extra cut after the filming to add that in, but the video was already quite long so I put it down as probably too much detail. (Always a tough balance to strike) but you are absolutely right that tax-free cash would exhaust eventually,
Great content but I'd like to see thoughts on single folk with no dependencies, i.e. no concern about IHT - what should we do - just keep maxing out pension contributions?
Thanks for watching and for your kind words! While (not advice) an area to consider for single individuals does remain looking closely at effective tax rates. This is the part where I contrast tax relief vs tax on extraction. While pensions will likely lose their IHT benefit, they are still incredibly effective wealth-building vehicles. I can't really give any sweeping statements on the best course of action as it's highly individual but the sentiment of this video does remain that it's all about the net position when using tax wrappers. So if I was planning for an individual, I'd be looking closely at their tax relief rate now or their tax wrapper options vs their drawdown strategy. That would inform their pension contribution strategy.
The capping of the lifetime TFC amount permitted already was a push in the direction of moving TFC to ISA as quickly as possible so that invested amount can be used for tax free income beyond the max TFC amount . The IHT changes make that an absolute no brainer .
Great video thank you! Noone is yet talking about what the tactics are for someone older - say 80 years old with a large personal pension. How on earth can they plan for this change?
My goodness George, this one is going to take some rewatching and _careful_ noting and consideration. Just _so much_ (high quality) information to consider and ponder. Thank you
Great video. Is it worth considering getting the non pension estate down closer to the residence nil rate band - maybe via a lifetime mortgage and gifting. That way that would leave some of the normal nil rate band to cover the pension?
What would be the most tax efficient drawdown number for 25 years (starting at 60) with full state pension and premium bonds - What size fund would I need to save?
Great video, I think beyond spending more and gifting more. The most obvious thing that people will look to do is take a chunk of a pension fund that you have and buy an annuity to then pay monthly for a joint life second death WOL policy written in trust, it has the double whammy of reducing your estate instantly and makes provision for paying some or all of this bill. Honestly an estate of £2.3 million pounds sounds a fortune, but it will become less so over time. This will mean an instant £700 K IHT. Having said all that, the danger here is people get hung up so much on the IHT bill, that they neglect to look at the net funds left to their beneficiaries, If you're in the position that you can afford to pay more money in to a pension then absolutely do so, at least based on a few of my assumptions when I ran some examples, so yes the IHT bill is massive, but the net amount left after that is even more massive.
I am a recent state pensioner and retired at 67 Up until now I have been taking the natural income from my investment Isa and have already used nearly all my TFC as the bank of mum and dad Following the budget, I am now withdrawing a higher amount from my crystallised pension instead to factor in 20% tax taken (& due) which amounts to an extraction rate of 4.5% as I see no merit in allowing my pension to grow as before. I have a IHT liability far exceeding the nil rate band Incidentally I recently fired my on-going advisor (paid for the last 7 years to not have to do much) for charging me a further 2% (which equates to actually 8%) for a recent TFC withdrawal . I found out later it could have been done for free, but was not told this. The ombudsman will decide if this is fair next week…..😮
So, why not maximise your non performing asset ( your home) , this would be an equity release. Which you would offset at death with your crystalled fund. Then you could continue SIPP funding and claim tax refunds. I assume you switch to Shares ISA at max tax free amount?
What if I make a large payment to my kids ( not from pension) and then live off my pension. I can keep the pot below the threshold for IHT and if I struggle they can gift me cash, if they haven’t spent it all
I wonder ( based on something I saw on UA-cam) whether and how some sort of offset mortgage would work to mortgage up the main residence and effectively allow spending that isn’t taxable, such that the SIPP is then used to repay the mortgage on death avoiding both IHT and income tax? And allowing gifting early ( need to survive 7 years etc) ?
Hi Simon, thanks for watching. It's a strategy which many wouldn't consider but equity release (*an option & definitely not advice) to reduce the estate could be considered. It certainly wouldn't be right for everyone and need to be worked out very carefully as often someone may be better off by selling and downsizing instead of paying high interest on the amount released. However, for someone who wanted to stay in their home who also wanted to get their estate down (and their kids didn't want to live in the house once they passed away) there could be a case that it could release funds early. One for another video!
Good video, one question if an inheritance is over the IHT 1m limit. Can the excess over the 1 m be passed on the children via a Deed of Variation. So the 1 million is retained as the Will the rest is the passed directly on the children within the 2 years. assuming the 2 m limit is not reached. Would this comply with the IHT rules?
Hi, thanks for watching. While a Deed of Variation can be a useful IHT planning tool, it can't circumvent inheritance tax. So - can a Deed of Variation be used to amend the Will upon death within 2 years. Yes, potentially. Would it be effective at avoiding IHT - unlikely. So if there were 2 spouses, nil-rates and MRNRBs you can't Deed of Variation the way out sadly. As leaving it to a trust would also typically be subject to IHT if above available bands. This is a complex and nuanced area so I'm required to say, please seek advice in this area and the above is for information purposes only.
Great vLog, many thanks. It would be good to see some examples of lifetime transfers out of income and what records/documentation to keep. Are dividends and interest from saving counted as income?
Try again,, sorry but where do you get the tax free sum of £16,756.66, I understand that the standard tax allowance of £12,570 is applied but where does the other £4k come from? Sorry for the stupid question
Pension withdrawals are subject to a 25% tax-free amount, so £16,756.66 is the maximum tax-free withdrawal per year. 25% of £16,756.66 is £4,189.16 tax-free, leaving £12,567.50 taxable, but this is inside your annual allowance.
If you withdraw £67,026.66 from your DC pension in a single tax year 25 per cent of this (£16,756.66) is tax free. The remaining £50,270 would be taxable but uses all of your nil rate band (£12,570) reducing the taxable amount to £37,700 which is then taxed using all of your 20 per cent allowance and you pay £7,540 in tax (37,700 * 0.2) giving you an effective tax rate of 11.25 per cent on the original £67,026.66. No 40 per cent tax paid.
Confusing as numbers are similar. If you withdraw £16,760 then a quarter is tax free and the remaining three quarters of that amount fills up your personal allowance exactly, so you pay no tax at all on the first £16,760 that you withdraw. (Assumes no other income from savings interest, dividends, etc…) Then if you withdraw a bit more than this amount, one quarter of the extra amount remains tax free and the remaining three quarters is taxed at 20%, giving a net marginal rate of 15% on the amount withdrawn above £16,760. If you choose to withdraw £16,760 x 2 = £33,520 then the first block has a tax rate that of 0% and the second 15%, so on average (overall) you will pay just 7.5%. If you withdraw £16,760 x 3 then your average tax rate will be (0% + 15% + 15%) / 3 = 10%.
As I understand it I can gift as much as I like providing I live for a further 7 years or out of "surplus income". Out of interest, is a premium bond win of £50K (aren't I the lucky one) regarded as surplus income? Additionally, what are the "rules" regarding surplus income? Using the 7 years rule, a measly £3k p/a total gift allowance is pathetic and would take forever to whittle down my pot, and I am keen to gift 20K p/a to my 2 kids..
Well that galloped along at a fair rate, and even though I’m very familiar with working this out now it still took some digesting. The thing that does not add up is, taking the TF allowance will only last 14 years, and then that throws all the figure out!
Thanks for watching. Yes, I nearly added back in a bit after the edit to explain the tax-free cash exhausting at a certain point but realised the video was already quite long, even after cutting it up as much as possible. That would bring up the effective tax rate on withdrawal in later retirement.
For me actually it was the tax free income for heirs if fund owner passes before 75 that was over generous. I would have thought removing that benefit would have netted them more tax income than IHT change and caused less fuss.
Great video - Thanks. Unless I missed it, it may have been beneficial to have touched on the loss of individuals IHT allowances if your estate exceeds £2m.
Yes, very astute point. I think it was on one of the slides in a *. I'm going to come back to that rule in a future video but I'm a bit hesitant to do too much on it as it could change under the consultation and in theory in their example the client doesn't get impacted by it IF (and it's a big IF) we get inflation increases on the MRNRB.
@ Thanks for taking the time to respond to this point. I appreciate it is a nice problem to have, I just do not think double or potentially even triple taxation is fair on contributions you have already paid in, if left to your children - It will just make everyone go to extreme lengths to avoid paying IHT. Surely they would be better off having IHT at 20% but make it impossible to get out of. Personally, I cannot see them increasing allowances with inflation unfortunately.
Hiya, at 14:41 you mention uplift at marginal tax rate - just checking - this appears to be the rate in the pre state pension years when it’s lower because of the tax free amount being available - but post stat pension date, the effective tax rate for the ‘lump sum’ gap would be higher because the state pension gets the tax free amount. Maybe I’ve misunderstood - but would have expected a blended rate to be used? Very impressed with the overall approach here though - you are certainly ahead of the pack in thinking all this through. Apologies if I’m making a non point.
Yes, very astute point. Thanks for watching. I didn't cover this on the video (as it was long enough as it is) but the 11% est marginal rate on extraction for the pension pot does 'roughly' hold throughout the example withdrawal strategy. It changes slightly after retirement as the tax-free cash eventually runs out. I'd set specific planned withdrawals from the pension to change when the State Pension kicked in. So at that point, total withdrawals from the flexible pot decreased. So the design was that the amount never went into the projected higher rate. When the State Pension kicked in, withdrawals from the pot were reduced.
For a person with a full state pension and no other income, and ignoring tax free cash. Then I would have thought you would not want to take out more than 50000 pa approximately (similar to the figure shown in this presentation), and therefore would net to 40k after income tax. On this basis, I can't see that you would be able to clear down a pension pot of much over £500k, without leaving a substantial amount that's going to be subject to 40% IHT eventually. If you have other income it's even harder. This assumes the target person/couple is likely to have some savings, and a house free of mortgage, a fair assumption in nany cases, i eould have thought
Can you explain why your example individual would not just gift the full25% tax free lump sum to children upfront......rather than drip feeding the pension surplus income slowly on an annual basis? Surely if you are going to make the gift the beneficiary would welcome it upfront
Sure (*this is not advice and does not cover all considerations. It is only to answer the specific question. Please ensure you seek advice specific to you before considering any planning.) 1) An outright gift would be a Potentially Exempt Transfer, typically within the 7-year rule. Making it ineffective for inheritance tax planning if death occurred within 7 years as it would fall back within the estate (with some potential tapering depending on when death occurs) unlike the Normal Expenditure Out of Income Rule which would be immediately outside of the estate as long as it fulfils the requirements of the exemption. 2) Generally, under a more consistent gifting strategy it's more realistic than a single large lump sum. Although this does get very individual. A reductive answer to inheritance tax planning is - gift it all away now! However, in reality, most have to counterbalance this alongside their own needs. I've never had a client who has felt wealthy enough to give their full tax-free cash away immediately and I've had many who have exceeded the allowable tax-free cash under legislation. I agree with the sentiments that now is better than later though and agree that is preferable. if an individual can afford it. Thanks for watching.
@@PrinciplesPersonalFinance How can a single parent pay Masters Degree Tuition fees and Maintenance Costs without incurring IHT charges,Pls? Would this come under Gifting,Pls?
Great video. Seems like the game has changed and basically we need to spend and gift like hell. Brings to mind the variable percentage withdrawal strategy from the bogleheads where you try and die with zero. Is John using ufpls or drawdown for the 67k withdrawals or does it matter?
Thanks for watching and for your kind words. An UFPLS OR drawdown would work in this example initially, but it would need to revert to drawdown once the State Pension kicks in and then the tax-free cash amount runs out. This is as the crystallised pension would have to be drawn at a different proportion to 75% vs 25% tax-free cash. 👍
I think that making the assumption that from 2030 the thresholds will start to increase again is false. Given that the government has just introduced a 40% IHT on pensions why is if save to assume any form of benevolence will materialize. They should have Increased the IHT threshold significantly to say 1 million at the same time as introducing the 40% levy and thus stopped dragging ordinary single people into scope. It's a disgrace that single people are targeted whilst married people get a double threshold.
i wish i was soo optimistic… this is just the “start” of taxing anyone with any surplus cash!! … the welfare state is getting bigger for obvious reasons.
The big unknown is what these clowns will do in future budgets, until the country gets rid of them. Great advice for the current position though, so thanks for the insights.
I pay into my employer pension scheme. I earn £75k but as I pay half my salary in, I only appear to get taxed 20% and not 40%, because of the increased contribution make. My question is, should I still be claiming more tax relief form HRMC via a tax return? Or have I had all the tax relief due by the contribution going into pension before tax?
Depends on what basis your pension is administered. If it’s relief at source, then yes you need to claim more from HMRC. If salary sacrifice or net pay, then no because you’ve already had the relief. Your payroll team should be able to tell you the basis on which your pension is administered.
If you take home £50k a year then the £25k salary sacrifice into your pension will get the full 40% relief. If your yearly salary is £37500 then the £12500 will only get 20% tax relief. I could be wrong but I suspect it works like this
He has his state pension IF it dosnt get taken from him by the “ means testing” which is also in the pipeline ….unfortunately this video is two trusting of the increasing Govnt overreach and aggressive money grab which is our new norm “
Yes, there were reminders before the budget that the state pension is a benefit not a right, although nothing seems to have changed at this stage. Having that £12.5k per person (assuming full contributions) could make a significant difference. If state pension is to be reduced if your pension pot is over £500k (say) then that argues for withdrawing more in early years to reduce the pot. But maybe the state pension will also consider savings outside of the pension as well as the pot itself… Too many maybes…
Thanks for watching. The £3k annual exemption is separate from the normal expenditure out-of-income rule. So it can be used in combination as long as you qualify for both exemptions. In relation to the £3k gift, it won't be considered as income for the individual making the gift or typically for the beneficiary of the gift (as far as taxable income anyway) potentially in the offhand way of saying it 'their Dad gave them some income' but not from HMRC's perspective typically. Hope that makes sense and sorry if I've misunderstood the question.
Love your content but the choppy editing and distracting effects detract from the great things you have to say. Keep it simple, your content doesn't need the cliche youtube gimmicks.
I will absolutely stop contributing, socialists can (and will) change the rules whenever they want. In a SIPP/SASS you cannot control the assets, you cannot leave the system. Better to set up a structure outside the UK even paying taxes while a UK resident and then eventually leave or stay and continue paying taxes. Staying in this system is very dangerous as the government can confiscate/change the rules at any time. Not a viable option
Thanks for the forecast! Could you help me with something unrelated: I have a SafePal wallet with USDT, and I have the seed phrase. (alarm fetch churn bridge exercise tape speak race clerk couch crater letter). Could you explain how to move them to Binance?
You video suggests that everyone’s pension is made up of tax relief. I have a SIPPS in excess of £2m, all made from rents and investments, I haven’t built it from contributions so inheritance of 40% tax is 40% direct tax. Suggestions welcome of how to mitigate this totally immoral tax?
A few people used SIPPS to circumnavigate iht hence why the rules have changed. Eggs in basket comes to mind. Think ltd companies will be used more and more for pass on assets to decendancts
Well all pension contributions get basic rate tax relief and you aren’t allowed to contribute more than you earn or £60K (currently) and if you are a higher rate tax payer, you should have been claiming that back
Or you could just spend it , after all the only reason anyone puts that much in a pension if the have no plans to spend it is to save on future taxes , give some houses away to your off spring and hope U live 7 years
I’m in the same situation as John I’m looking to retire earlier now pensions are part of IHT. I’m not married but have two kids which I was looking to leave some of it. It makes no sense for me to keep working longer to fill my pension. I’m not sure the government have realised many high skilled people will retire early.
Me too. Their loss is 250k of income tax pa.
I love the term extraction rate of tax ! I think this key, if it goes in at 40+% and you take out 25% tax free and only pay at 20% you are big winner. I think the biggest change as result of the budget is it will accelerate my gifting .
Glad to hear the video was useful and thanks for watching!
@@PrinciplesPersonalFinance Excellent video. Income drawdown from a DC pension - have HMRC given a definitive answer to whether this is considered income or capital for the purposes of gifts? I have seem some debate online that it may be considered capital and therefore cannot qualify for gifts out of income.
@@grahamwarrin3313 wouldn't the fact that it is taxed as income automatically mean it is classified as income. They surely (🤔) can't have it both ways?
@@n0_h4ndl3 You would think. But apparently taxing as income and actually classing as income can be different. I would support a class legal action to challenge this on pensions because how else are you to grow your pension pot if not by buying assets that you later sell to provide an income?
Happy Thanksgiving, Principles Personal Finance! This is an outstanding video. It is excellent to see you have over 20k subscribers and over 500 likes on it. It is a testament to your hard work and creativity!
Thanks David, grateful for your kind words and support. It's been from day 1 so hugely appreciated! 🙌
@@PrinciplesPersonalFinance My utmost pleasure, indeed.
Spend it all while you can. Working hard is not rewarded anymore. The lazy unemployables are making a mockery of workers.
somewhere between 800k - 1.3m by pension access age - that's the pot size that lets you take full advantage of the (now capped) 25% tax free amount at the lower end, and to keep it under the 40% tax band on withdrawals at the upper end.
There are going to be increasing cases of people who only get standard relief on the way in but are taxed at the higher rate on withdrawals due to the stupid rules we have in place and the effects of tax drag
Food for thought, thanks
The 25% tax-free amount is limited currently to £268,275 so would be exhausted in the 13th year if drawing down £67,000 a year
Very astute point. It doesn't impact the calcs here as it's factored into the lump sum, but you're absolutely right. I was going to do a extra cut after the filming to add that in, but the video was already quite long so I put it down as probably too much detail. (Always a tough balance to strike) but you are absolutely right that tax-free cash would exhaust eventually,
Great video, liked the part where you clarified that £67k was the top end you could withdraw before hitting the 40% bracket.
Thank you! Glad that was useful!
Thank you very much for this video. It is the most useful content that I have seen following the budget, in terms of how I am planning to drawdown..
Thanks for watching, glad it was helpful!
Great content but I'd like to see thoughts on single folk with no dependencies, i.e. no concern about IHT - what should we do - just keep maxing out pension contributions?
Thanks for watching and for your kind words!
While (not advice) an area to consider for single individuals does remain looking closely at effective tax rates. This is the part where I contrast tax relief vs tax on extraction. While pensions will likely lose their IHT benefit, they are still incredibly effective wealth-building vehicles.
I can't really give any sweeping statements on the best course of action as it's highly individual but the sentiment of this video does remain that it's all about the net position when using tax wrappers. So if I was planning for an individual, I'd be looking closely at their tax relief rate now or their tax wrapper options vs their drawdown strategy. That would inform their pension contribution strategy.
The capping of the lifetime TFC amount permitted already was a push in the direction of moving TFC to ISA as quickly as possible so that invested amount can be used for tax free income beyond the max TFC amount . The IHT changes make that an absolute no brainer .
Agree, if you have that much tfc, take it and get it in ISAs and premium bonds asap.
Terrific content, well presented. You should have 100k subs really.
Thanks Simon, appreciate you giving this a watch!
What can i do if my company want to reduce my company pension after being retired for 6 years?
Great video thank you! Noone is yet talking about what the tactics are for someone older - say 80 years old with a large personal pension. How on earth can they plan for this change?
Withdraw it and enjoy using it or gifting it!
My goodness George, this one is going to take some rewatching and _careful_ noting and consideration. Just _so much_ (high quality) information to consider and ponder. Thank you
Thank you Iain! Very grateful for you watching and your kind words.
Great video. Is it worth considering getting the non pension estate down closer to the residence nil rate band - maybe via a lifetime mortgage and gifting. That way that would leave some of the normal nil rate band to cover the pension?
What would be the most tax efficient drawdown number for 25 years (starting at 60) with full state pension and premium bonds - What size fund would I need to save?
premium bonds have a max investment of £50k ? and all winnings are tax free
Great video, I think beyond spending more and gifting more. The most obvious thing that people will look to do is take a chunk of a pension fund that you have and buy an annuity to then pay monthly for a joint life second death WOL policy written in trust, it has the double whammy of reducing your estate instantly and makes provision for paying some or all of this bill. Honestly an estate of £2.3 million pounds sounds a fortune, but it will become less so over time. This will mean an instant £700 K IHT. Having said all that, the danger here is people get hung up so much on the IHT bill, that they neglect to look at the net funds left to their beneficiaries, If you're in the position that you can afford to pay more money in to a pension then absolutely do so, at least based on a few of my assumptions when I ran some examples, so yes the IHT bill is massive, but the net amount left after that is even more massive.
Great comment and thoughts here!
Completely agree that the 'net amount' is worth considering carefully as-well.
I am a recent state pensioner and retired at 67
Up until now I have been taking the natural income from my investment Isa and have already used nearly all my TFC as the bank of mum and dad
Following the budget, I am now withdrawing a higher amount from my crystallised pension instead to factor in 20% tax taken (& due) which amounts to an extraction rate of 4.5% as I see no merit in allowing my pension to grow as before. I have a IHT liability far exceeding the nil rate band
Incidentally I recently fired my on-going advisor (paid for the last 7 years to not have to do much) for charging me a further 2% (which equates to actually 8%) for a recent TFC withdrawal . I found out later it could have been done for free, but was not told this. The ombudsman will decide if this is fair next week…..😮
So, why not maximise your non performing asset ( your home) , this would be an equity release. Which you would offset at death with your crystalled fund. Then you could continue SIPP funding and claim tax refunds. I assume you switch to Shares ISA at max tax free amount?
What if I make a large payment to my kids ( not from pension) and then live off my pension. I can keep the pot below the threshold for IHT and if I struggle they can gift me cash, if they haven’t spent it all
Another way is take the pension show you have more income than you need and it can be gifted without IHT.
I wonder ( based on something I saw on UA-cam) whether and how some sort of offset mortgage would work to mortgage up the main residence and effectively allow spending that isn’t taxable, such that the SIPP is then used to repay the mortgage on death avoiding both IHT and income tax? And allowing gifting early ( need to survive 7 years etc) ?
Hi Simon, thanks for watching. It's a strategy which many wouldn't consider but equity release (*an option & definitely not advice) to reduce the estate could be considered.
It certainly wouldn't be right for everyone and need to be worked out very carefully as often someone may be better off by selling and downsizing instead of paying high interest on the amount released. However, for someone who wanted to stay in their home who also wanted to get their estate down (and their kids didn't want to live in the house once they passed away) there could be a case that it could release funds early.
One for another video!
Good video, one question if an inheritance is over the IHT 1m limit. Can the excess over the 1 m be passed on the children via a Deed of Variation. So the 1 million is retained as the Will the rest is the passed directly on the children within the 2 years. assuming the 2 m limit is not reached. Would this comply with the IHT rules?
Hi, thanks for watching. While a Deed of Variation can be a useful IHT planning tool, it can't circumvent inheritance tax.
So - can a Deed of Variation be used to amend the Will upon death within 2 years. Yes, potentially. Would it be effective at avoiding IHT - unlikely.
So if there were 2 spouses, nil-rates and MRNRBs you can't Deed of Variation the way out sadly. As leaving it to a trust would also typically be subject to IHT if above available bands.
This is a complex and nuanced area so I'm required to say, please seek advice in this area and the above is for information purposes only.
Great vLog, many thanks. It would be good to see some examples of lifetime transfers out of income and what records/documentation to keep. Are dividends and interest from saving counted as income?
Thanks for watching, yes dividends and interest can be counted as income.
Try again,, sorry but where do you get the tax free sum of £16,756.66, I understand that the standard tax allowance of £12,570 is applied but where does the other £4k come from? Sorry for the stupid question
The higher amount includes the 25% tax free amount on pension withdrawals, which is addition to the £12,570 personal allowance.
Pension withdrawals are subject to a 25% tax-free amount, so £16,756.66 is the maximum tax-free withdrawal per year. 25% of £16,756.66 is £4,189.16 tax-free, leaving £12,567.50 taxable, but this is inside your annual allowance.
If you withdraw £67,026.66 from your DC pension in a single tax year 25 per cent of this (£16,756.66) is tax free. The remaining £50,270 would be taxable but uses all of your nil rate band (£12,570) reducing the taxable amount to £37,700 which is then taxed using all of your 20 per cent allowance and you pay £7,540 in tax (37,700 * 0.2) giving you an effective tax rate of 11.25 per cent on the original £67,026.66. No 40 per cent tax paid.
Confusing as numbers are similar. If you withdraw £16,760 then a quarter is tax free and the remaining three quarters of that amount fills up your personal allowance exactly, so you pay no tax at all on the first £16,760 that you withdraw. (Assumes no other income from savings interest, dividends, etc…)
Then if you withdraw a bit more than this amount, one quarter of the extra amount remains tax free and the remaining three quarters is taxed at 20%, giving a net marginal rate of 15% on the amount withdrawn above £16,760.
If you choose to withdraw £16,760 x 2 = £33,520 then the first block has a tax rate that of 0% and the second 15%, so on average (overall) you will pay just 7.5%.
If you withdraw £16,760 x 3 then your average tax rate will be (0% + 15% + 15%) / 3 = 10%.
@@grahamwarrin3313 Thank you so much for breaking that down - was struggling to understand that lower effective tax calc 👍
As I understand it I can gift as much as I like providing I live for a further 7 years or out of "surplus income". Out of interest, is a premium bond win of £50K (aren't I the lucky one) regarded as surplus income?
Additionally, what are the "rules" regarding surplus income? Using the 7 years rule, a measly £3k p/a total gift allowance is pathetic and would take forever to whittle down my pot, and I am keen to gift 20K p/a to my 2 kids..
Thanks George
Appreciate you watching Simon. 🙌
that was a really interesting video. thanks
Thanks, glad you enjoyed it and thanks for watching!
I think the last question was asking if the gift is seen as income for the recipient.
Well that galloped along at a fair rate, and even though I’m very familiar with working this out now it still took some digesting.
The thing that does not add up is, taking the TF allowance will only last 14 years, and then that throws all the figure out!
Thanks for watching.
Yes, I nearly added back in a bit after the edit to explain the tax-free cash exhausting at a certain point but realised the video was already quite long, even after cutting it up as much as possible. That would bring up the effective tax rate on withdrawal in later retirement.
For me actually it was the tax free income for heirs if fund owner passes before 75 that was over generous. I would have thought removing that benefit would have netted them more tax income than IHT change and caused less fuss.
I was expecting the pre-75 change but not the IHT change!
Great video - Thanks. Unless I missed it, it may have been beneficial to have touched on the loss of individuals IHT allowances if your estate exceeds £2m.
Yes, very astute point. I think it was on one of the slides in a *.
I'm going to come back to that rule in a future video but I'm a bit hesitant to do too much on it as it could change under the consultation and in theory in their example the client doesn't get impacted by it IF (and it's a big IF) we get inflation increases on the MRNRB.
@ Thanks for taking the time to respond to this point. I appreciate it is a nice problem to have, I just do not think double or potentially even triple taxation is fair on contributions you have already paid in, if left to your children - It will just make everyone go to extreme lengths to avoid paying IHT. Surely they would be better off having IHT at 20% but make it impossible to get out of. Personally, I cannot see them increasing allowances with inflation unfortunately.
Yet another great video
Thank you! Grateful for your kind words, really keeps me going on the long edits!
Hiya, at 14:41 you mention uplift at marginal tax rate - just checking - this appears to be the rate in the pre state pension years when it’s lower because of the tax free amount being available - but post stat pension date, the effective tax rate for the ‘lump sum’ gap would be higher because the state pension gets the tax free amount. Maybe I’ve misunderstood - but would have expected a blended rate to be used? Very impressed with the overall approach here though - you are certainly ahead of the pack in thinking all this through. Apologies if I’m making a non point.
Yes, very astute point. Thanks for watching.
I didn't cover this on the video (as it was long enough as it is) but the 11% est marginal rate on extraction for the pension pot does 'roughly' hold throughout the example withdrawal strategy. It changes slightly after retirement as the tax-free cash eventually runs out.
I'd set specific planned withdrawals from the pension to change when the State Pension kicked in. So at that point, total withdrawals from the flexible pot decreased. So the design was that the amount never went into the projected higher rate. When the State Pension kicked in, withdrawals from the pot were reduced.
For a person with a full state pension and no other income, and ignoring tax free cash. Then I would have thought you would not want to take out more than 50000 pa approximately (similar to the figure shown in this presentation), and therefore would net to 40k after income tax. On this basis, I can't see that you would be able to clear down a pension pot of much over £500k, without leaving a substantial amount that's going to be subject to 40% IHT eventually. If you have other income it's even harder.
This assumes the target person/couple is likely to have some savings, and a house free of mortgage, a fair assumption in nany cases, i eould have thought
Scotland upper tax bandsl are lower 43k I think
Can you explain why your example individual would not just gift the full25% tax free lump sum to children upfront......rather than drip feeding the pension surplus income slowly on an annual basis? Surely if you are going to make the gift the beneficiary would welcome it upfront
Sure (*this is not advice and does not cover all considerations. It is only to answer the specific question. Please ensure you seek advice specific to you before considering any planning.)
1) An outright gift would be a Potentially Exempt Transfer, typically within the 7-year rule. Making it ineffective for inheritance tax planning if death occurred within 7 years as it would fall back within the estate (with some potential tapering depending on when death occurs) unlike the Normal Expenditure Out of Income Rule which would be immediately outside of the estate as long as it fulfils the requirements of the exemption.
2) Generally, under a more consistent gifting strategy it's more realistic than a single large lump sum. Although this does get very individual. A reductive answer to inheritance tax planning is - gift it all away now! However, in reality, most have to counterbalance this alongside their own needs. I've never had a client who has felt wealthy enough to give their full tax-free cash away immediately and I've had many who have exceeded the allowable tax-free cash under legislation.
I agree with the sentiments that now is better than later though and agree that is preferable. if an individual can afford it.
Thanks for watching.
@@PrinciplesPersonalFinance How can a single parent pay Masters Degree Tuition fees and Maintenance Costs without incurring IHT charges,Pls? Would this come under Gifting,Pls?
just enough to meet the tax Allowance the rest should be in a ISA free of tax and accessible.
Great video. Seems like the game has changed and basically we need to spend and gift like hell. Brings to mind the variable percentage withdrawal strategy from the bogleheads where you try and die with zero. Is John using ufpls or drawdown for the 67k withdrawals or does it matter?
Thanks for watching and for your kind words.
An UFPLS OR drawdown would work in this example initially, but it would need to revert to drawdown once the State Pension kicks in and then the tax-free cash amount runs out. This is as the crystallised pension would have to be drawn at a different proportion to 75% vs 25% tax-free cash. 👍
Erm I must have missed the sum. What was the figure? I get the logic.
I am in similar position to “John”
I think that making the assumption that from 2030 the thresholds will start to increase again is false. Given that the government has just introduced a 40% IHT on pensions why is if save to assume any form of benevolence will materialize. They should have Increased the IHT threshold significantly to say 1 million at the same time as introducing the 40% levy and thus stopped dragging ordinary single people into scope. It's a disgrace that single people are targeted whilst married people get a double threshold.
i wish i was soo optimistic… this is just the “start” of taxing anyone with any surplus cash!! … the welfare state is getting bigger for obvious reasons.
👏👏👏
I put money into a pension but did not get tax relief when I put it in 😂
The big unknown is what these clowns will do in future budgets, until the country gets rid of them. Great advice for the current position though, so thanks for the insights.
I pay into my employer pension scheme. I earn £75k but as I pay half my salary in, I only appear to get taxed 20% and not 40%, because of the increased contribution make. My question is, should I still be claiming more tax relief form HRMC via a tax return? Or have I had all the tax relief due by the contribution going into pension before tax?
The last one. Your contribution went in BEFORE tax, so it never got taxed and therefore you have maximum tax relief already. No need to claim.
Depends on what basis your pension is administered. If it’s relief at source, then yes you need to claim more from HMRC. If salary sacrifice or net pay, then no because you’ve already had the relief. Your payroll team should be able to tell you the basis on which your pension is administered.
@@peter466thanks I will try and ask them
If you take home £50k a year then the £25k salary sacrifice into your pension will get the full 40% relief.
If your yearly salary is £37500 then the £12500 will only get 20% tax relief.
I could be wrong but I suspect it works like this
I've assumed you used work has a salary sacrifice scheme otherwise you fill in an end of year tax form to claim the extra 20%
He has his state pension IF it dosnt get taken from him by the “ means testing” which is also in the pipeline ….unfortunately this video is two trusting of the increasing Govnt overreach and aggressive money grab which is our new norm
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Yes, there were reminders before the budget that the state pension is a benefit not a right, although nothing seems to have changed at this stage. Having that £12.5k per person (assuming full contributions) could make a significant difference. If state pension is to be reduced if your pension pot is over £500k (say) then that argues for withdrawing more in early years to reduce the pot. But maybe the state pension will also consider savings outside of the pension as well as the pot itself… Too many maybes…
Does the 3k yearly gift count as income
Thanks for watching.
The £3k annual exemption is separate from the normal expenditure out-of-income rule. So it can be used in combination as long as you qualify for both exemptions.
In relation to the £3k gift, it won't be considered as income for the individual making the gift or typically for the beneficiary of the gift (as far as taxable income anyway) potentially in the offhand way of saying it 'their Dad gave them some income' but not from HMRC's perspective typically.
Hope that makes sense and sorry if I've misunderstood the question.
@PrinciplesPersonalFinance thanks that is great I think spend spend spend
Love your content but the choppy editing and distracting effects detract from the great things you have to say. Keep it simple, your content doesn't need the cliche youtube gimmicks.
Thanks for the feedback, I'll bear that in mind for future edits.
I will absolutely stop contributing, socialists can (and will) change the rules whenever they want. In a SIPP/SASS you cannot control the assets, you cannot leave the system. Better to set up a structure outside the UK even paying taxes while a UK resident and then eventually leave or stay and continue paying taxes. Staying in this system is very dangerous as the government can confiscate/change the rules at any time. Not a viable option
Who has 1 million pension pot!
Thanks for the forecast! Could you help me with something unrelated: I have a SafePal wallet with USDT, and I have the seed phrase. (alarm fetch churn bridge exercise tape speak race clerk couch crater letter). Could you explain how to move them to Binance?
Wow only £1.3 million no worries then 😂😂
You video suggests that everyone’s pension is made up of tax relief. I have a SIPPS in excess of £2m, all made from rents and investments, I haven’t built it from contributions so inheritance of 40% tax is 40% direct tax. Suggestions welcome of how to mitigate this totally immoral tax?
But would your contributions have had tax relief ?
A few people used SIPPS to circumnavigate iht hence why the rules have changed. Eggs in basket comes to mind. Think ltd companies will be used more and more for pass on assets to decendancts
Well all pension contributions get basic rate tax relief and you aren’t allowed to contribute more than you earn or £60K (currently) and if you are a higher rate tax payer, you should have been claiming that back
Or you could just spend it , after all the only reason anyone puts that much in a pension if the have no plans to spend it is to save on future taxes , give some houses away to your off spring and hope U live 7 years
I didn't make any contributions.
i cant understand what you're saying and neither do the subtitles.
Just move to a country where you are treated best
The lighting in your videos is so bad. Blurred and bad on the eyes. Do yourself a favour and change it