Pension in Drawdown - Tax Implications if Spouse dies aged 75+

thriftytracey

I've been researching this but still confused.

My husband has a DC pension in drawdown (but not taking any income currently).  We have withdrawn 6% of the tax free lump sum from it.  

If my spouse dies aged 75+ is the remainder of the tax free lump sum taxed?  If I use the inherited fund to purchase an annuity is it still subject to tax?

I understand that any drawdown income from the fund would be taxed but would I have to pay 20% tax on the whole of the fund on inheritance?

Thanks

Marcon

thriftytracey said:

I've been researching this but still confused.

My husband has a DC pension in drawdown (but not taking any income currently).  We have withdrawn 6% of the tax free lump sum from it.  

If my spouse dies aged 75+ is the remainder of the tax free lump sum taxed?  If I use the inherited fund to purchase an annuity is it still subject to tax?

I understand that any drawdown income from the fund would be taxed but would I have to pay 20% tax on the whole of the fund on inheritance?

Thanks

Under current legislation you'd pay no tax on withdrawals if he dies before age 75. If he dies after age 75, you'd pay income tax at your marginal rate on withdrawals (there is no tax free lump cash lump sum on an inherited pension). If you purchase an annuity you'll be taxed on the income from that.

There is currently no tax when you inherit a pension, only when you actually make withdrawal(s), at which point you are taxed at your marginal rate of income tax.

It's far too soon to know what will eventually happen come 2027, so pointless to speculate now.

thriftytracey

So, do many people withdraw the full amount of their tax free cash from a pension in drawdown before aged 75? 

MallyGirl

it would seem to make sense to do so

thriftytracey

Thanks Marcon & Mallygirl.

Here's hoping we both survive past 75! 

I've been frugal with our TFLS so far.  No cruises for us! Not that I would want to go on one anyway ....

Pat38493

thriftytracey said:

Thanks Marcon & Mallygirl.

Here's hoping we both survive past 75! 

I've been frugal with our TFLS so far.  No cruises for us! Not that I would want to go on one anyway ....

Yes - I've heard that most of the time it makes sense to always take the tax free cash before age 75 if not done by then to avoid this situation.

Aside - although it may not be your cup of tea, cruise holidays are not necessarily an massive luxury - if you shop around and are flexible on dates, they can be very good value for money as they are effectively a full board hotel on the sea, sometimes for not much more than the daily price of a hotel room on land  - there have been times we found it was more expensive to stay at a place in the UK for a week or two than book a cruise!

Albermarle

thriftytracey said:

Thanks Marcon & Mallygirl.

Here's hoping we both survive past 75! 

I've been frugal with our TFLS so far.  No cruises for us! Not that I would want to go on one anyway ....

One point though is if you withdraw it and do not spend it, you need to think about what do with it.
In the pension it is protected from any tax on cash interest, capital gains tax and dividend tax.
So ideally you should put it into ISA's which have the same protections. As the maximum you can add to an ISA each year is £20K ( each) it could be wise not to take out all the TFLS at once ( depending on how big it is ) .

mgdavid

thriftytracey said:

So, do many people withdraw the full amount of their tax free cash from a pension in drawdown before aged 75? 

Yes, no reason not to, and as this budget demonstrates, plenty of reasons to do it.

MallyGirl

Albermarle said:

thriftytracey said:

Thanks Marcon & Mallygirl.

Here's hoping we both survive past 75! 

I've been frugal with our TFLS so far.  No cruises for us! Not that I would want to go on one anyway ....

One point though is if you withdraw it and do not spend it, you need to think about what do with it.
In the pension it is protected from any tax on cash interest, capital gains tax and dividend tax.
So ideally you should put it into ISA's which have the same protections. As the maximum you can add to an ISA each year is £20K ( each) it could be wise not to take out all the TFLS at once ( depending on how big it is ) .

I am certainly now considering crystallising enough of my SIPP to fill the ISA this year and next before I retire.

Hal17

If you took the tax free sum from your pension, would this count towards your annual income?

If it does you could then consider a bigger gift from income.

Qyburn

MallyGirl said:

I am certainly now considering crystallising enough of my SIPP to fill the ISA this year and next before I retire.

Out of interest, why before you retire rather than before you're 75? Assuming they're not one and the same.

I was thinking to do the same but starting a few years before age 75, taking a total of £40k per year from our two pensions and moving that into ISAs with appropriate investments.

Is the concern that the ISA allowance might be cut?