Flexible drawdown/Inheritance of remaining pensions pot

TrickyDicky101

Hi All

My father has a flexible drawdown plan and in recent years has been extracting as much money as he can from it each year whilst still remaining within the 20% tax bracket.

He wonders if, given the recent changes in pensions legislation, what the tax implications would be should he stop withdrawing money and leave the funds invested within his flexible drawdown plan?

In particular, he would like to know:
1. Whether the 'pot' would pass to my mother without deduction of any taxes on his death; or
2. Whether the 'pot' would pass to me without deduction of any taxes (please assume that the value of the total estate is below the IHT threshold) should my mother pre-decease him.

Presumably if the estate was over the IHT threshold in (2) above, then the minimum the 'pot' would suffer in passing to me would be 40%?

Any assistance on this gratefully accepted.

Mirador

If you die before you take anything from your pension, it will usually be paid as a lump sum to your beneficiaries tax-free.

As long as it is less than the lifetime allowance (£1.25million in tax year 2014/15) it will be paid tax-free, unless you die at age 75 or older when it will currently be taxed at 55%.

The Government have announced changes to the way death benefits from pensions are taxed from April 2015:

If you die before age 75 – your pension can be paid to your beneficiaries tax-free, either as a lump sum, an annuity, or through drawdown.
If you die age 75 or older – your pension can be paid as a lump sum which will initially be taxed at 45%. Or your beneficiaries can use drawdown and will then only pay tax at their marginal rate.
There will normally be no inheritance tax to pay.

If you have taken money from your pension pot, what happens to the money left in it will depend on how you decided to use your pension pot.

IF YOU’VE MONEY LEFT IN FLEXIBLE DRAWDOWN

If you die with your money in flexible drawdown, your spouse, partner or dependants can do one of three things. They can:

Stay in flexible drawdown which is taxed as income
Buy an annuity which is taxed as income
Take the money in cash which is currently subject to a 55% tax charge.
The Government have announced changes to the way death benefits from pensions are taxed from April 2015:

If you die before age 75 – your pension can be paid to your beneficiaries tax-free, either as a lump sum, an annuity, or through drawdown.
If you die age 75 or older – your pension can be paid as a lump sum which will initially be taxed at 45%. If your beneficiaries use drawdown or buy an annuity they will only pay tax at their marginal rate.
There will normally be no inheritance tax to pay.

Dunnit

My only query with that explanation would be what is the implication of whether the 25% PCLS has/has not been taken i.e. if as being mooted now that it is worth taking 25%TF at each withdrawal as opposed to a PCLS 25% would it then be prudent for someone knowing they had only a couple of months to live to take the full 25% out of the fund assuming there was no IHT to worry about?

TrickyDicky101

Mirador - thanks. I will let my father know. I suspect it would be in his - and my mother's - best interest to continue withdrawing the maximum amount he can each year whilst remaining within the 20% bracket.