Norman, from Diss, asks: "My wife and I have a significant portfolio of PEPs and ISAs – we each have just over £92,000 invested. We are unlikely to ever spend the invested capital as we just take a regular income from the investments. While we appreciate the income tax efficiency of these investments, we are concerned that all we are doing is saving up an inheritance tax liability for our sons. What can we do about this?
Many people, particularly those in retirement, who have built up large holdings of PEPs and ISAs, are now starting to question the relevance of these supposedly 'tax-free' investments within their longerterm financial planning.
PEPs and ISAs are actually not as tax-efficient as they used to be and they can certainly no longer be called a tax-free investment.
I would question the logic of a retired investor who may be saving a small amount of income tax on PEP and ISA income in the remainder of their lifetime, but who will leave a legacy of a big inheritance tax bill for their children after their death.
Having reviewed the information you sent to me, it is clear that your PEPs and ISAs are all held in equity-based funds, where 10 per cent income tax is deducted from any dividend income received into the fund.
Thus, you only benefit from a 12 per cent saving in income tax on the dividend income. You currently each receive an
average income yield from your PEPs and ISAs of 3.5 per cent gross, which is £3,220 per annum, based upon invested capital of around £92,000 each.
The 12 per cent income tax saved on this dividend income is £387 a year each. However, if you surrendered your PEPs and ISAs and reinvested £92,000 each into more inheritance tax-friendly investments such as bonds, the saving in inheritance tax would be around £36,800 each.
If you leave the PEPs and ISAs where they are, it would take you around 95 years to save the same amount in income tax.
Also, you would both be able to take a tax-efficient income of up to 5 per cent per annum ongoing from the new investments.
That's £4,600 each a year. In my opinion, the huge inheritance tax saving outweighs the small income tax saving and you can both have a higher level of tax-efficient income paid to you for the remainder of your lifetimes.
Contacting NickNick Plumb is an independent financial adviser. Send your questions to Nick at Bright Financial Planning, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to
nickplumb@aol.com or telephone Nick on 01449 675674.
Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. For any readers requiring specific advice on their own circumstances, Nick is happy to offer a complimentary initial meeting.
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