INVESTMENTS
the life of the client and , since death benefits remain an asset of the SIPP Drawdown , any remaining guaranteed income instalments can be put into a Dependent SIPP Drawdown when Anne dies . That means beneficiaries will only pay income tax on income paid while the rest can pass down through the family tax efficiently , creating a true family trust . Anne did the same as Option 2 , but bought and held the annuity within the SIPP Drawdown . At age 75 , the invested SIPP Drawdown has grown to £ 939,310 and the annuity asset is worth £ 290,436 ( purchase price of £ 490,436 minus income paid of £ 200,000 ). So , the value of the SIPP Drawdown at age 75 is £ 1,229,746 (£ 939,310 plus £ 290,310 ), meaning the growth that is tested via BCE 5a is £ 104,746 taxed at 25 %, resulting in Anne ’ s SIPP Drawdown administrator paying HMRC just £ 26,187 . And remember – the annuity asset can still pay or re-invest a further £ 20,000 for at least 20 years ( or be commuted to a lump sum if the client dies ).
In summary If you have clients who need regular income from their pension , then all income options need to be considered . As you ’ ve seen , Option 3 can offer the best of both worlds . It gives peace of mind , keeps clients invested for longer and reduces the tax charge , should they breach the LTA .
Option 2 – SIPP Drawdown with a standalone annuity This strategy is more likely to be used for a client that prefers certainty over flexibility . They have a low capacity for loss and could be a cautious investor . However , the client loses control of the annuity purchase price . It is no longer an asset of the SIPP Drawdown . The guaranteed income isn ’ t flexible , so it cannot be reduced or stopped by Anne or her dependants . This means , after age 75 , any dependants ’ income will be taxed at their marginal rate , even if they don ’ t need it . Anne split her crystallised fund into a guaranteed annuity costing £ 490,436 , paying £ 20,000 for a minimum of 30 years . The balance of £ 634,564 is invested in the SIPP Drawdown , no withdrawals . Again , using the same investment and CPI assumptions , the resulting SIPP investment at age 75 is worth £ 939,310 , meaning the growth that is tested via BCE 5a is £ 304,746 . The age 75 tax charge is 25 % on the excess growth , resulting in Anne ’ s pension administrator paying HMRC £ 76,187 in tax . Again , this is a large tax charge that Anne may or may not have been expecting . That being said , she has peace of mind knowing that her £ 20,000 will be paid irrespective of investment market performance and for at least 30 years . This has given her the confidence to remain invested with the rest of her pension assets , which are still held within the pension wrapper and can be passed down through the generations free of IHT .
Option 3 – Annuity held within the SIPP Drawdown Option 3 is an increasingly popular strategy as it does what both Options 1 and 2 can do , and more . The annuity remains an asset of the SIPP Drawdown from outset and you know exactly what the value of this income producing asset will be at age 75 for LTA purposes . The whole plan offers flexibility and tax control throughout
Between April 2014 ( when the LTA was £ 1.25 million ) and April 2020 ( when the LTA was £ 1.055 million ), HMRC collected around £ 1.36 billion in excess LTA tax charges .
Source : HMRC October 2021
Also , for consideration Remember that a pension may not be the only asset a 75-year-old can use to fund their retirement . They could switch off all the income and withdrawals from the pension , reinvest the guaranteed income back into the invested drawdown , growing the value of the pension or ‘ family trust ’. They can then use property wealth ( releasing equity from a main residence , second home and / or buyto-lets , subject to lending criteria ) to release tax free capital / income . This creates a debt on the estate , which may improve the client ’ s inheritance tax position .
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This article is based on Canada Life ’ s understanding of applicable UK tax legislation and current HM Revenue & Custom ’ s practice , as at April 2022 , and could be subject to change in the future . It is provided for professional advisers only . Any recommendations are the adviser ’ s sole responsibility .
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