Does taking the 25% tax-free Lump Sum Allowance affect death benefits?

ebc

I have a drawdown pension pot of £1.5m (previously untouched) and a protected LTA of £1.25m. I am considering taking out my maximum 25% tax-free Lump Sum Allowance (£312,500), but have seen conflicting information about the impact this may have on death benefits if I die before the age of 75.

My understanding was that if I do this and die before age 75:

1.       The £312,500 would become part of my estate and therefore part of the consideration for IHT when I die.

2.       The remainder of my Lump Sum and Death Benefit Allowance (£937,500) would be passed on to my nominated pension beneficiaries completely free of Income Tax. (And would also be free of IHT if I die before April 2027).

3.       The excess over my Lump Sum and Death Benefit Allowance (£250,000) would be subject to Income Tax at the beneficiary’s nominal rate (if they chose to take it as a lump sum).

Is this understanding correct? The reason I ask is that, re point 2 above, I have seen a couple of articles on-line indicating that by taking the 25% tax-free lump sum I would be crystalising the whole pension pot, and therefore the other 75% of my Lump Sum and Death Benefit Allowance (£937,500) left in the pension pot would be subject to Income Tax at the beneficiary’s nominal rate (if they chose to take it as a lump sum), even if I die before the age of 75. 

AlanP_2

I think you are right on 1 and 2.

No idea on 3 sorry, never looked at what happens when you get to £1m plus pots.

dasherman

Isn't the maximum allowable tax free amount £268,250?

NoMore

dasherman said:

Isn't the maximum allowable tax free amount £268,250?

The op has a protected lta allowing them to get more than the current max. 

leosayer

OP, part of the reason for confusion might be that you haven't quoted the correct terms as follows:

Lump Sum Allowance - normally £268,275 but higher in your case
Lump Sum and Death Benefit Allowance - normally £1,073,100 but higher in your case

Other than that, my understanding is the same as yours. 

dasherman

NoMore said:

dasherman said:

Isn't the maximum allowable tax free amount £268,250?

The op has a protected lta allowing them to get more than the current max. 

My mistake.

ebc

leosayer said:

OP, part of the reason for confusion might be that you haven't quoted the correct terms as follows:

Lump Sum Allowance - normally £268,275 but higher in your case
Lump Sum and Death Benefit Allowance - normally £1,073,100 but higher in your case

Other than that, my understanding is the same as yours. 

Thanks for the clarification, I have now reworded the question