What to do with an AVC. Drawdown?

slinger2

I've got an old AVC, now with Utmost Life and Pensions. Originally it was with the Pru (contributed to from 1988 to 1997) and later with Equitable Life (I forget all the details). Unit based investments currently worth £30k. I've never done anything with it, so no withdrawals. I'm 69.

My financial situation is such that I don't really need the money. Inheritance tax is an issue for me. I'm a basic rate taxpayer. I'm wondering whether drawdown is a good option for me. Seems I can get 25% out tax free and leave the rest invested. Would that avoid IHT? Or just leave it as it is?

Any thoughts? 

ColdIron

The 25% would then form part of your estate while the remainder wouldn't

If you 'don't really need the money.' and 'Inheritance tax is an issue for me' leaving it where it is seems the obvious choice

slinger2

ColdIron said:

The 25% would then form part of your estate while the remainder wouldn't

If you 'don't really need the money.' and 'Inheritance tax is an issue for me' leaving it where it is seems the obvious choice

But wouldn't it then be part of my estate when I died? Excuse my ignorance.

ColdIron

DC pension pots are not included in your estate when you die and therefore not subject to inheritance tax

Edit: As your pension isn't legally part of your estate, it is not covered by your Will. So make sure you inform you pension provider of your intended beneficiary(s), this is usually called an 'Expression of Wish'

dunstonh

I've got an old AVC, now with Utmost Life and Pensions. Originally it was with the Pru (contributed to from 1988 to 1997) and later with Equitable Life (I forget all the details).

You must have transferred it as Pru still exists and didn't sell a legacy book to Eq Life.

 I'm wondering whether drawdown is a good option for me. Seems I can get 25% out tax free and leave the rest invested. Would that avoid IHT? Or just leave it as it is?

It would increase IHT.  Not avoid it.   Leaving it in the pension and making sure its a pension that can be held past age 75, would avoid IHT.     Some pensions lose the ability to be held outside of the estate from age 75 onwards (mainly legacy pensions from a different era).      So, you need to check the death benefits of your plan to make sure a) they can be held from 75+  b) offer beneficiary drawdown  (names can vary but that is one of the most common).

xylophone

Do you have anyone to whom you would like to gift?

You might consider drawing down and using the money to make regular gifts from income or a one off gift in hope of a PET?

slinger2

dunstonh said:

I've got an old AVC, now with Utmost Life and Pensions. Originally it was with the Pru (contributed to from 1988 to 1997) and later with Equitable Life (I forget all the details).

You must have transferred it as Pru still exists and didn't sell a legacy book to Eq Life.

 I'm wondering whether drawdown is a good option for me. Seems I can get 25% out tax free and leave the rest invested. Would that avoid IHT? Or just leave it as it is?

It would increase IHT.  Not avoid it.   Leaving it in the pension and making sure its a pension that can be held past age 75, would avoid IHT.     Some pensions lose the ability to be held outside of the estate from age 75 onwards (mainly legacy pensions from a different era).      So, you need to check the death benefits of your plan to make sure a) they can be held from 75+  b) offer beneficiary drawdown  (names can vary but that is one of the most common).

The Utmost web site is not encouraging. "It is not possible to nominate a beneficiary." "Income Tax: If you die before age 75, the benefits are exempt from income tax. After age 75, death benefits become subject to income tax. If they are paid direct to an individual they will be taxed using their tax rate. If paid to your estate or trustees, they will be taxed at 45%." "Inheritance tax: The benefits do form part of your estate for inheritance tax purposes, unless the policy has been placed under trust."

Looks like I might need to get advice.

slinger2

xylophone said:

Do you have anyone to whom you would like to gift?

You might consider drawing down and using the money to make regular gifts from income or a one off gift in hope of a PEP?

Sounds like a good option. Presumably I'd have to pay my usual rate of income tax (after the initial tax free lump sum). However it would help the IHT aspect, since the gifts from income would be outside the IHT umbrella.

xylophone

Typo - I should have written PET - I have corrected,

Yes, you would have to pay tax on the amount over the PCLS - you might prefer to draw down in such a way as not to go up a tax band.

Albermarle

slinger2 said:

dunstonh said:

I've got an old AVC, now with Utmost Life and Pensions. Originally it was with the Pru (contributed to from 1988 to 1997) and later with Equitable Life (I forget all the details).

You must have transferred it as Pru still exists and didn't sell a legacy book to Eq Life.

 I'm wondering whether drawdown is a good option for me. Seems I can get 25% out tax free and leave the rest invested. Would that avoid IHT? Or just leave it as it is?

It would increase IHT.  Not avoid it.   Leaving it in the pension and making sure its a pension that can be held past age 75, would avoid IHT.     Some pensions lose the ability to be held outside of the estate from age 75 onwards (mainly legacy pensions from a different era).      So, you need to check the death benefits of your plan to make sure a) they can be held from 75+  b) offer beneficiary drawdown  (names can vary but that is one of the most common).

The Utmost web site is not encouraging. "It is not possible to nominate a beneficiary." "Income Tax: If you die before age 75, the benefits are exempt from income tax. After age 75, death benefits become subject to income tax. If they are paid direct to an individual they will be taxed using their tax rate. If paid to your estate or trustees, they will be taxed at 45%." "Inheritance tax: The benefits do form part of your estate for inheritance tax purposes, unless the policy has been placed under trust."

Looks like I might need to get advice.

The first bit is as expected. If you leave a pension pot to someone, how their withdrawals are taxed depends on how old you are when you die ( bit of a strange rule but there you go ).

The second part about IHT ( which is a separate issue from the one above) is not normal.
DC pensions are normally held in trust ( by the pension provider) so are not included in your estate.