LTA abolition from 2024

zagfles

Linton said:

zagfles said:

I think there's a significant change here wrt death benefits.

Currently, someone can inherit a pension of someone who died under 75 and designate it to drawdown, and the drawdown is tax free. The money remains in the pension and so no tax on investment growth, outside scope for IHT etc.

Under the new rules, it seems that can still be done BUT the drawdown will be taxable. But there's the ability to take the remainder of the deceased's full "lump sum tax free limit" as a tax free lump sum.

So for instance someone dies under 75 with an untouched £400k pension. Beneficiary has the choice of taking a £400k tax free lump sum (as it's within the 1.07m allowance), or designating £400k into drawdown but that drawdown would then be subject to income tax. Or possibly split it eg take £200k tax free and £200k into taxable drawdown.

So I think they've sneaked in a change to make pensions less of a IHT avoidance vehicle. Some would say this is perfectly reasonable (inc me).

I may of course have misunderstood...

I think you misunderstand.  A pension inherited from someone who dies before 75 is generally  with some exceptions completely tax free including all drawdowns.  I think what may be causing confusion is that if the pension was over the the LTA the excess was, and presumably will continue to be, taxable.  This aspect needs to be redefined after the abolition of the LTA

See https://www.gov.uk/tax-on-pension-death-benefits

I doubt very much that a change to the general rule would be sneaked through in a measure that clears any loose ends left over by abolishing LTA.

What exactly do you think I've misunderstood? Your second sentence is exactly what I said.

But the new rules state that an inherited pension will be taxable even if the deceased died under 75. But that there will be a lump sum allowance of £1.07m minus any lump sums already taken.

So a beneficiary can only get the pension tax free if they take it as a lump sum. If they leave it in a beneficiaries/successors drawdown pension, it'll be taxable.

Telegraph article someone posted in another thread says the same thing.

Pat38493

zagfles said:

Linton said:

zagfles said:

I think there's a significant change here wrt death benefits.

Currently, someone can inherit a pension of someone who died under 75 and designate it to drawdown, and the drawdown is tax free. The money remains in the pension and so no tax on investment growth, outside scope for IHT etc.

Under the new rules, it seems that can still be done BUT the drawdown will be taxable. But there's the ability to take the remainder of the deceased's full "lump sum tax free limit" as a tax free lump sum.

So for instance someone dies under 75 with an untouched £400k pension. Beneficiary has the choice of taking a £400k tax free lump sum (as it's within the 1.07m allowance), or designating £400k into drawdown but that drawdown would then be subject to income tax. Or possibly split it eg take £200k tax free and £200k into taxable drawdown.

So I think they've sneaked in a change to make pensions less of a IHT avoidance vehicle. Some would say this is perfectly reasonable (inc me).

I may of course have misunderstood...

I think you misunderstand.  A pension inherited from someone who dies before 75 is generally  with some exceptions completely tax free including all drawdowns.  I think what may be causing confusion is that if the pension was over the the LTA the excess was, and presumably will continue to be, taxable.  This aspect needs to be redefined after the abolition of the LTA

See https://www.gov.uk/tax-on-pension-death-benefits

I doubt very much that a change to the general rule would be sneaked through in a measure that clears any loose ends left over by abolishing LTA.

What exactly do you think I've misunderstood? Your second sentence is exactly what I said.

But the new rules state that an inherited pension will be taxable even if the deceased died under 75. But that there will be a lump sum allowance of £1.07m minus any lump sums already taken.

So a beneficiary can only get the pension tax free if they take it as a lump sum. If they leave it in a beneficiaries/successors drawdown pension, it'll be taxable.

Telegraph article someone posted in another thread says the same thing.

Well the last post about the Investor Chronicle above and the one from the Telegraph under a different thread seem to indicate that this is indeed a change, although they don't even mention your conclusion that the amount can still be taken tax free as a lump sum.

zagfles

Pat38493 said:

zagfles said:

Linton said:

zagfles said:

I think there's a significant change here wrt death benefits.

Currently, someone can inherit a pension of someone who died under 75 and designate it to drawdown, and the drawdown is tax free. The money remains in the pension and so no tax on investment growth, outside scope for IHT etc.

Under the new rules, it seems that can still be done BUT the drawdown will be taxable. But there's the ability to take the remainder of the deceased's full "lump sum tax free limit" as a tax free lump sum.

So for instance someone dies under 75 with an untouched £400k pension. Beneficiary has the choice of taking a £400k tax free lump sum (as it's within the 1.07m allowance), or designating £400k into drawdown but that drawdown would then be subject to income tax. Or possibly split it eg take £200k tax free and £200k into taxable drawdown.

So I think they've sneaked in a change to make pensions less of a IHT avoidance vehicle. Some would say this is perfectly reasonable (inc me).

I may of course have misunderstood...

I think you misunderstand.  A pension inherited from someone who dies before 75 is generally  with some exceptions completely tax free including all drawdowns.  I think what may be causing confusion is that if the pension was over the the LTA the excess was, and presumably will continue to be, taxable.  This aspect needs to be redefined after the abolition of the LTA

See https://www.gov.uk/tax-on-pension-death-benefits

I doubt very much that a change to the general rule would be sneaked through in a measure that clears any loose ends left over by abolishing LTA.

What exactly do you think I've misunderstood? Your second sentence is exactly what I said.

But the new rules state that an inherited pension will be taxable even if the deceased died under 75. But that there will be a lump sum allowance of £1.07m minus any lump sums already taken.

So a beneficiary can only get the pension tax free if they take it as a lump sum. If they leave it in a beneficiaries/successors drawdown pension, it'll be taxable.

Telegraph article someone posted in another thread says the same thing.

Well the last post about the Investor Chronicle above and the one from the Telegraph under a different thread seem to indicate that this is indeed a change, although they don't even mention your conclusion that the amount can still be taken tax free as a lump sum.

Typical of journalists/politicians, including that might dampen the outrage they're trying to create. But it's clear in the gov document, there's a lump sum allowance which is tax free, the issue is that won't be able to be retained within a pension wrapper tax free.
But they're right that the change is being sneaked in - this is supposed to be LTA abolision legislation, this affects people nowhere near the LTA eg someone who dies with a £100k pension.

Sunnylifeover50plan

It's a bit of a game changer for me. I'd be far more inclined to take a tax free lump sum after on my 55th birthday next year. Once out of the SIPP I'd feel more comfortable if spare funds were drip fed each year into ISA's and/ or put into a UK home. I can only take a tax free lump sum in the UK, as in Spain I'd get hammered on income tax, pension drawdown is treated as income here.

I partly chose a SIPP for the UK tax treatment if I died relatively young and my wife needed access to a good level of tax free funds.

Blighty here I come.

Albermarle

So, it appears that this is indeed a major change that is sneaking through the back door of unrelated legislation. 

The back door sneaking is unacceptable, but the removal of some of the very generous beneficiary tax treatment for pensions is probably a sensible move. There never was much logic around the '75 year death ' rule.

Sea_Shell

Income Tax aside...

Does anything left invested in an inherited pension pot (any any age) remain outside the estate of the beneficiary on second death, as if it was their own?

Albermarle

zagfles said:

Pat38493 said:

zagfles said:

Linton said:

zagfles said:

I think there's a significant change here wrt death benefits.

Currently, someone can inherit a pension of someone who died under 75 and designate it to drawdown, and the drawdown is tax free. The money remains in the pension and so no tax on investment growth, outside scope for IHT etc.

Under the new rules, it seems that can still be done BUT the drawdown will be taxable. But there's the ability to take the remainder of the deceased's full "lump sum tax free limit" as a tax free lump sum.

So for instance someone dies under 75 with an untouched £400k pension. Beneficiary has the choice of taking a £400k tax free lump sum (as it's within the 1.07m allowance), or designating £400k into drawdown but that drawdown would then be subject to income tax. Or possibly split it eg take £200k tax free and £200k into taxable drawdown.

So I think they've sneaked in a change to make pensions less of a IHT avoidance vehicle. Some would say this is perfectly reasonable (inc me).

I may of course have misunderstood...

I think you misunderstand.  A pension inherited from someone who dies before 75 is generally  with some exceptions completely tax free including all drawdowns.  I think what may be causing confusion is that if the pension was over the the LTA the excess was, and presumably will continue to be, taxable.  This aspect needs to be redefined after the abolition of the LTA

See https://www.gov.uk/tax-on-pension-death-benefits

I doubt very much that a change to the general rule would be sneaked through in a measure that clears any loose ends left over by abolishing LTA.

What exactly do you think I've misunderstood? Your second sentence is exactly what I said.

But the new rules state that an inherited pension will be taxable even if the deceased died under 75. But that there will be a lump sum allowance of £1.07m minus any lump sums already taken.

So a beneficiary can only get the pension tax free if they take it as a lump sum. If they leave it in a beneficiaries/successors drawdown pension, it'll be taxable.

Telegraph article someone posted in another thread says the same thing.

Well the last post about the Investor Chronicle above and the one from the Telegraph under a different thread seem to indicate that this is indeed a change, although they don't even mention your conclusion that the amount can still be taken tax free as a lump sum.

Typical of journalists/politicians, including that might dampen the outrage they're trying to create. But it's clear in the gov document, there's a lump sum allowance which is tax free, the issue is that won't be able to be retained within a pension wrapper tax free.
But they're right that the change is being sneaked in - this is supposed to be LTA abolision legislation, this affects people nowhere near the LTA eg someone who dies with a £100k pension.

Thinking about it although a seemingly generous tax free lump sum withdrawal is allowed, it will still stop a tax free  beneficiary pension being passed down the generations ad infinitum, which has been an area highlighted in the past as being rather too tax friendly.

Linton

I agree that the issue is not the income tax free status of the inherited pension as that is exlicitly specified in the proposed draft legislation with much the same restrictions as currently. Rather the question is what can one do with the various "Lump Sums".  All we do know is that they need to be "claimed".  I cannot see that this necessarily means a cash lump sum.

As far as I can see nothing is stated as changing in this area in the proposed legislation.  The problem is I dont know what the existing legislation says.  New legislation is generally couched as a change to the existing legislation and without the wider context it can be difficult to see what is going on.

Can anyone provide a reference to the existing law?

Sea_Shell

Is it going to be an all or nothing cliff edge (the under 75 thing)?

So you could currently have a couple drawing up to their PA each, so have an income of ~£25k, and if one of them died early, then they could maintain their income without any additional tax.

But under the proposed changes, the widow would only have their own PA, and so would have to pay tax on anything above that (excluding any TFLS)

Why not have, at least, the ability to inherit your spouses PA limit, like an enhanced Marriage Allowance???    That seems fairer, so at least let a widow maintain their income stream at the same amount of tax paid than if they had not been widowed.   

Am I understanding it right, and who agrees with me? 

Pat38493

I do wonder if we have to wait until either HMRC clarifies the situation, or a pensions lawyer of some kind writes an article about it in the context of the existing legislation.  As Linton points out, the current document is not entirely clear and could be interpreted in a few ways on several points, and also it may be that it has to be interpreted in the context of the detailed existing legislation which is not included in the link, and also any other legislation which has a bearing on it - for example, there doesn't appear to be anything at all mentioned about taking tax free lump sums as part of the flexible pension benefits other than the part about flexible access drawdown death benefits. 

You would have to assume that taking a tax free lump sum and putting the corresponding amount into drawdown would be tested against the same threshold, but it's not clear why that's not listed in the document.