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

MallyGirl

Qyburn said:

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?

My thinking was that I get £20k TFLS out now and put it in my ISA while I am still working and putting nearly £60k in workplace pension. I don't have spare cash to fill the ISA as well right now and the £20k is annual so use it or lose it. Then when I retire I will be taking out enough such that the 75% taxable portion is just under the 40% tax band. 
Basically shifting anything I don't need from pension to ISA.

Albermarle

Hal17 said:

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.

A tax free sum is normally not considered as income.
So using it in this way would presumably not get HMRC approval.

Marcon

thriftytracey said:

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

MallyGirl said:

it would seem to make sense to do so

Not necessarily. If you have no financial dependents and it is tax advantageous for you to use phased drawdown, taking maximum tax free cash simply because you are about to hit 75 may not be the best course of action for you as the pension owner. 

thriftytracey

Marcon said:

thriftytracey said:

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

MallyGirl said:

it would seem to make sense to do so

Not necessarily. If you have no financial dependents and it is tax advantageous for you to use phased drawdown, taking maximum tax free cash simply because you are about to hit 75 may not be the best course of action for you as the pension owner. 

We don't have financial dependents but if one of us dies aged 75+ then the TFLS is lost.  If my husband dies his state pension income ends and his DB pension reduces to 50% so I would be worse off.  If I died he would my lose state pension and TFLS from my DC pension in drawdown.

Marcon

thriftytracey said:

Marcon said:

thriftytracey said:

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

MallyGirl said:

it would seem to make sense to do so

Not necessarily. If you have no financial dependents and it is tax advantageous for you to use phased drawdown, taking maximum tax free cash simply because you are about to hit 75 may not be the best course of action for you as the pension owner. 

We don't have financial dependents but if one of us dies aged 75+ then the TFLS is lost.  If my husband dies his state pension income ends and his DB pension reduces to 50% so I would be worse off.  If I died he would my lose state pension and TFLS from my DC pension in drawdown.

Then in your case it might well make sense to take maximum cash before age 75. As your post neatly highlights, everyone needs to look at their own situation rather than automatically 'going with the flow' !

SnowMan

thriftytracey said:

Marcon said:

thriftytracey said:

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

MallyGirl said:

it would seem to make sense to do so

Not necessarily. If you have no financial dependents and it is tax advantageous for you to use phased drawdown, taking maximum tax free cash simply because you are about to hit 75 may not be the best course of action for you as the pension owner. 

We don't have financial dependents but if one of us dies aged 75+ then the TFLS is lost.  If my husband dies his state pension income ends and his DB pension reduces to 50% so I would be worse off.  If I died he would my lose state pension and TFLS from my DC pension in drawdown.

Money taken out of the pension will form part of the estate whereas in the pension until 2027 it doesn't count as part of the 'estate' for IHT purposes.

So talking more generally, somebody currently aged over 75 who has untaken pension funds on which 25% tax free cash is available might want to not access the tax free cash until just before the switchover to the new regime, because although the beneficiary will miss out on the 25% tax free cash in the event of death, they may avoid inheritance tax on the tax free cash that hasn't been withdrawn.

For somebody whose estate is going to fall within inheritance tax nil rate bands (allowing for cash from the withdrawal) then it makes sense to access the 25% tax free cash now if they are already over age 75 so as not to lose the tax free cash in a circumstance that inheritance tax is not affected because there is none.

Individual consideration is going to be needed where there is a spouse involved and it may depend on whether the spouse or someone else inherits the pension on death.

RogerPensionGuy

I have just been looking back at how slow IHT gets adjusted, house price inflation and how much the IHT take has been, now plonk in SIPP values going forward and IHT now scooping these SIPP pots, leads me to believe that in the future IHT  overall tax take will be ramping up very nicely these next many decades and will become/remain a great gold-plated stream for HMRC.

On another note, I always thought the extra 175 or 350K extra IHT allowance passing on a house to direct descendants was strange. My view being as we age we may be better downsizing from say a house to a smaller house, then maybe a flat, then a flat near to all amenities example, this would involve moving at least once or twice maybe, that is so costly in so many ways and SDLT is always a hammer on top. However if older people elect to rent to allow more simple cheaper downsizing/location moves their estates don't get the extra 175 or 350K.

With the above in mind and now the IHT pension loophole being closed it reminds me of that old saying, only two things certain being death and taxes.

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https://www.gov.uk/government/publications/rates-and-allowances-inheritance-tax-thresholds-and-interest-rates/inheritance-tax-thresholds-and-interest-rates

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https://landregistry.data.gov.uk/app/ukhpi/browse?from=1960-01-01&location=http://landregistry.data.gov.uk/id/region/united-kingdom&to=2020-02-01&lang=en

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https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/