Withdraw from Pension, contribute to ISA

xylophone

You might make each of your children a regular allowance from your income.

Or, if you want to control how it is spent (which just frees up their own income to be spent on wine, women and song ), you could pay down their mortgages, pay the electricity/gas/phone/ bills etc.

Or treat them to an annual holiday.

But either you want to make a gift or you don't - if you don't, the tax man will be more than happy to benefit from your largesse!

zagfles

atush wrote: »

the whole point it, there will be NO IHT as pensions are outside of your estate, and the money can remain in the pension and be inherited tax free if stays there and is drawn as income.

Only should they decide to remove the money all in one go, will it be taxed if you died after age 75.

It will be taxed regardless of how the beneficiaries draw it if the OP dies after 75. It'll just get taxed more if they draw it all in one go.

zagfles

dunstonh wrote: »

Myself and a colleague were just saying the other day that we wondered how many people would be foolish enough to do that thinking it was a good thing to do.



Pensions and ISAs share the same investment options and the same charges. They are both tax free whilst invested. The pension is outside of the estate so no IHT. The ISA is within the estate and potentially chargeable to IHT.

You pay no tax on the pension if you die. The beneficiary only pays tax on the pension if they take anything out of the pension. If they leave it in the pension, there is no tax to pay and they can continue it.



Losing 20% of the value to get money out of an investment that has the same charges and investment options doesnt add up in most cases (exceptions can apply).

A pension is not a lot of use if you don't take anything out of it. Unless the OP dies under 75, or the beneficiary is a non taxpayer, tax will be paid when the money is taken out.

dunstonh

A pension is not a lot of use if you don't take anything out of it.

Nor is an ISA or any other tax wrapper. Hence why you focus on the tax position.

Unless the OP dies under 75, or the beneficiary is a non taxpayer, tax will be paid when the money is taken out.

Correct. And no IHT to worry about and the longer the better.

atush

Whereas, ISA money comes out of ISA if the inheritor is not a spouse I think?

jamesd

Sort of. The spouse get a extra ISA allowances called Additional Permitted Subscriptions equal to the total amount the deceased had in their ISAs when they died. The original ISA loses its ISA status but an inheriting spouse can put that value into ISA. This applies even if all of the ISA contents were bequeathed to someone else.

The extra allowance has to be used with the original ISA provider the deceased used and must be used either within three years of death or 180 days after the end of administration of the estate if that is longer. The spouse must be entitled to subscribe to ISAs to use this allowance.

atush

But non spouse inheritors lose the Isa status on the money was my point.

jamesd

Yes, they do. I thought it might be useful to say more about how the rules work.

taking_stock

Culzean wrote: »

I thought this might be a good place to check what 'appears' an obvious plan I'm intending to follow

My wife and I are both 61, just retired and have final salary pensions that will be adequate to support us

We also have fairly decent SIPPs and are now planning on taking an annual sum up to the 40% tax threshold and putting into ISA's. It seems the logical thing to do. The only consideration I can see is the tax on death situation. We both assume we will live beyond 75, we could wait until then but then we would be unlikely to be able to get any significant proportion of our fund out at 20% before we passed away

Is there something fundamental that I am missing?

not bad logic at all, ignoring the IHT issue.
If, for example, you anticipated a large purchase in the future, like a very flash car or a holiday home etc, then withdrawing it at 20% gradually, rather than 40 or 45% in one tax year does indeed make good sense.
As jamesd mentions, it also protects you from future income tax/legislation changes.


in your case, with DB pensions, it really becomes matter of choice, anticipated expenditure/gifts and longer-term IHT.

Culzean

taking_stock wrote: »

not bad logic at all, ignoring the IHT issue.
If, for example, you anticipated a large purchase in the future, like a very flash car or a holiday home etc, then withdrawing it at 20% gradually, rather than 40 or 45% in one tax year does indeed make good sense.
As jamesd mentions, it also protects you from future income tax/legislation changes.


in your case, with DB pensions, it really becomes matter of choice, anticipated expenditure/gifts and longer-term IHT.

Unfortunately won't be planning any major purchases, we have enough to get by on, but not tons more (ignoring a contingency for when we're uber wrinkly) and the amount in the SIPP isn't going to make my kids wealthy either

We're not talking gazillions but I think it's sensible to draw it out gradually and, as an earlier post suggested, how long this "flexibility" continues is anyone's guess