Pension beneficiary lives overseas

lucyandthomas

My dad (age 78)  has a DC pension (currently approx 120k) with Standard Life. 

He has named me and my brother as joint beneficiaries of this. Dad and I live in the UK, and my brother has lived in Australia for nearly 15 years and has no plans to return to live in UK. Since the budget, we've had a chat about his pension, and it came to light that none of us have a clue how the system works when a beneficiary lives overseas. 

Unless needed for care, it is likely that there will still be money in his DC pension when the inevitable happens (hopefully many years from now). Dad has taken his tax-free cash, but has no need to drawdown any more of his DC pension as he has a DB pension and full SP too. If he did take any money from his DC pension, it would be taxed at 40%, so he isn't planning to do so unless he needs it.

How would the pension be taxed when my brother draws down his share? I know I'll be taxed at my normal rate for any withdrawals as a UK resident, but how would this work for a beneficiary living overseas? I'm assuming that inheritance tax (if the threshold is breached) would be independent of the location of the beneficiaries, as Dad (and therefore his estate) are in the UK.

Many thanks

JoeCrystal

https://community.ato.gov.au/s/topic/a0N9s000000DacBEAS/your-super?t=all

Maybe there is something on their site that might have the answers?

newatc

I asked this question same time ago as I have family in Australia.

He would now be charged IHT at 40% ( after 2027) if IHT is payable.

 As I recall the answer, I received, on the income tax was that it would be likely that he would be taxed on emergency tax level which would probably be an overpayment but they could make a claim back to HMRC (which sounded rather unlikely to me for someone living abroad).

In summary I suspect he will taxed heavily. 

xylophone

If in one way or another 40% tax will be paid, perhaps father should consider drawing down the pension and making regular gifts to his offspring until it is all gone?

MallyGirl

xylophone said:

If in one way or another 40% tax will be paid, perhaps father should consider drawing down the pension and making regular gifts to his offspring until it is all gone?

as long as that doesn't cause deprivation of assets issues if he should need to fund care. This will obviously depend on what other assets he has to fund that.

lucyandthomas

Xylophone's response seems to have disappeared, but the assumptions he made were correct. Dad is a homeowner, and lives comfortably on his DB and state pensions. These should cover any future care needs without need for his pension.

Time for another chat with Dad - as he's already a 40% tax payer, we'd all thought that it would be a bad idea to start drawing down his DC pension, but if he gives this away immediately as surplus income, that would at least mean that it would then be out of the picture for inheritance tax (and solves the problem of my brother accessing the inherited pension from Australia in the future). Funny (although not really) how paying 40% tax now seems like it could be the best idea. Dad gives away surplus income already and keeps good records. Maybe time to increase the amounts.

Thanks for replying

xylophone

Xylophone's response seems to have disappeared,

Sorry about that - I had deleted with a view to adding more thoughts then didn't get round to it.

But yes, I had just mentioned that we did not know father's housing /other savings position but that assuming that he owned his own home and had other means as well as his DB and state pensions, these seemed likely to cover any care needs.

Since he already had sufficient means to keep up his standard of living, clearly any money taken as income from his DC would be surplus to requirements.

Any gifts he made would not be with a view to creating or increasing eligibility for means tested benefits - rather it could be seen as sensible tax/IHT planning.

Clearly father will need to consider his position but I can see a case for gifting now.

lucyandthomas

Thanks all

Albermarle

lucyandthomas said:

Xylophone's response seems to have disappeared, but the assumptions he made were correct. Dad is a homeowner, and lives comfortably on his DB and state pensions. These should cover any future care needs without need for his pension.

Time for another chat with Dad - as he's already a 40% tax payer, we'd all thought that it would be a bad idea to start drawing down his DC pension, but if he gives this away immediately as surplus income, that would at least mean that it would then be out of the picture for inheritance tax (and solves the problem of my brother accessing the inherited pension from Australia in the future). Funny (although not really) how paying 40% tax now seems like it could be the best idea. Dad gives away surplus income already and keeps good records. Maybe time to increase the amounts.

Thanks for replying

Although some of the unused pension pot sounds like it maybe become liable for IHT, it will most likely only be a part of it. It depends on how big his estate will be, including from 2027 any unused pension pot and what nil rate band (s) he has .
Do not assume ( as many people seem to be doing) that 40% IHT will be payable on all of it.

af1963

If he's already a 40% taxpayer, so any additional withdrawals will be taxed at (at least ) 40%, how is that any better than leaving it alone and potentially paying 40% IHT later ?

af1963

... lives comfortably on his DB and state pensions. These should cover any future care needs without need for his pension.

Maybe. Care can cost a lot.  £80k a year is not unusual, sometimes more.  Not everyone ends up needing it, but for those who do, resources can disappear fast.