pension cashing out

brehom5

in the UK, please can someone confirm if this method is correct if parent has a untouched pension pot that needs passing to an offspring

example:

73 years old, untouched pension amount total 60k

This needs going to offspring as gift

Withdraw 25% tax free, transfer straight to offspring

withdrawn 75% which is taxable, transfer straight to offspring

Is there any other way to cash in on this to reduce the 75% tax, and as it will be gifted, should offspring be aware of any tax implications or the parent gifting it e.g. if using it to buy a home or any other investment?

Also if theres an alternative method which makes more sense e.g. cash out 25% tax free but then set the offspring as a beneficiary, and the offspring withdraws it after that?

Any advice appreciated

Dazed_and_C0nfused

I don't there is any way to avoid to 75% that is taxable being the income of the parent.

As that is £45k there could be a lot of tax to pay, but the exact amount depends what other taxable income (and type of income) they have and how many years they could take the money out of the pension. For example given we are fairly close to the end of the current tax year spreading the withdrawals out over two tax years might save some tax.

jimjames

brehom5 said:

73 years old, untouched pension amount total 60k

This needs going to offspring as gift

Why does it "need" to go as a gift? The donor presumably is still alive at 73 and could well need this money for their retirement or care? What other funds do they have? Other income will also affect the rate of tax paid. If they have substantial other income (which I assume they do if they can give away £60k) then their rate of tax on withdrawing could be much higher. 

The other thing to check is if deprivation of capital applies to pensions (I don't know) if they might need care in the future.

brehom5

Dazed_and_C0nfused said:

I don't there is any way to avoid to 75% that is taxable being the income of the parent.

As that is £45k there could be a lot of tax to pay, but the exact amount depends what other taxable income (and type of income) they have and how many years they could take the money out of the pension. For example given we are fairly close to the end of the current tax year spreading the withdrawals out over two tax years might save some tax.

thank you, so far looks like a no brainer take the 25% out, then its important to workout parent's current taxable income, is that to try and keep it within the same threshold e.g. if currently on 20% tax rate, keep the remainder we withdraw of the 45k pension pot, so it doesn't move into the next tax bracket for that year? then spread the withdrawal out, is that correct? e.g. if only 10k away from maxing out the 20% taxable income, the parent is wiser to split that final amount by 4 years to stop it going into 40% tax bracket? and for the offspring it doesn't matter as its a gift so tax free as the parent will have paid the tax on the cashout

jimjames said:

brehom5 said:

73 years old, untouched pension amount total 60k

This needs going to offspring as gift

Why does it "need" to go as a gift? The donor presumably is still alive at 73 and could well need this money for their retirement or care? What other funds do they have? Other income will also affect the rate of tax paid. If they have substantial other income (which I assume they do if they can give away £60k) then their rate of tax on withdrawing could be much higher. 

What if the pension amount is a second pension pot that is not needed by the parent hence want to gift it, existing pension covering lifestyle would that be an issue at all, thanks for the replies so far

MarkCarnage

brehom5 said:

Dazed_and_C0nfused said:

I don't there is any way to avoid to 75% that is taxable being the income of the parent.

As that is £45k there could be a lot of tax to pay, but the exact amount depends what other taxable income (and type of income) they have and how many years they could take the money out of the pension. For example given we are fairly close to the end of the current tax year spreading the withdrawals out over two tax years might save some tax.

thank you, so far looks like a no brainer take the 25% out, then its important to workout parent's current taxable income, is that to try and keep it within the same threshold e.g. if currently on 20% tax rate, keep the remainder we withdraw of the 45k pension pot, so it doesn't move into the next tax bracket for that year? then spread the withdrawal out, is that correct? e.g. if only 10k away from maxing out the 20% taxable income, the parent is wiser to split that final amount by 4 years to stop it going into 40% tax bracket? and for the offspring it doesn't matter as its a gift so tax free as the parent will have paid the tax on the cashout

jimjames said:

brehom5 said:

73 years old, untouched pension amount total 60k

This needs going to offspring as gift

Why does it "need" to go as a gift? The donor presumably is still alive at 73 and could well need this money for their retirement or care? What other funds do they have? Other income will also affect the rate of tax paid. If they have substantial other income (which I assume they do if they can give away £60k) then their rate of tax on withdrawing could be much higher. 

What if the pension amount is a second pension pot that is not needed by the parent hence want to gift it, existing pension covering lifestyle would that be an issue at all, thanks for the replies so far

Your first part is broadly correct. 
Regarding the second part, it doesn't matter at all whether it's second, third or nth pension 'pot', withdrawing it beyond the tax free amount would crystallise an income tax liability on the holder at their marginal rate in that tax year. 

Linton

brehom5 said:

in the UK, please can someone confirm if this method is correct if parent has a untouched pension pot that needs passing to an offspring

example:

73 years old, untouched pension amount total 60k

This needs going to offspring as gift

Withdraw 25% tax free, transfer straight to offspring

withdrawn 75% which is taxable, transfer straight to offspring

Is there any other way to cash in on this to reduce the 75% tax, and as it will be gifted, should offspring be aware of any tax implications or the parent gifting it e.g. if using it to buy a home or any other investment?

Also if theres an alternative method which makes more sense e.g. cash out 25% tax free but then set the offspring as a beneficiary, and the offspring withdraws it after that?

Any advice appreciated

Withdrawing the money from the pension paying the tax then gifting it is the only way to do what you want whilst the parent is alive. 

Some points:
1) Best to make the withdrawals over 2 years if an extra £45K income in a single tax year would put the parent into the higher rate tax band.

2) Making the gift could cause problems if the parent is expecting the local council to pay for future care needs or becomes bankrupt or dies leaving insufficient money to pay any debts.

3) If the parent dies within 7 years the gift would still form part of their estate for tax purposes and could therefore potentially give rise to extra inheritance tax.

brehom5

Linton said:

brehom5 said:

in the UK, please can someone confirm if this method is correct if parent has a untouched pension pot that needs passing to an offspring

example:

73 years old, untouched pension amount total 60k

This needs going to offspring as gift

Withdraw 25% tax free, transfer straight to offspring

withdrawn 75% which is taxable, transfer straight to offspring

Is there any other way to cash in on this to reduce the 75% tax, and as it will be gifted, should offspring be aware of any tax implications or the parent gifting it e.g. if using it to buy a home or any other investment?

Also if theres an alternative method which makes more sense e.g. cash out 25% tax free but then set the offspring as a beneficiary, and the offspring withdraws it after that?

Any advice appreciated

Withdrawing the money from the pension paying the tax then gifting it is the only way to do what you want whilst the parent is alive. 

Some points:
1) Best to make the withdrawals over 2 years if an extra £45K income in a single tax year would put the parent into the higher rate tax band.

2) Making the gift could cause problems if the parent is expecting the local council to pay for future care needs or becomes bankrupt or dies leaving insufficient money to pay any debts.

3) If the parent dies within 7 years the gift would still form part of their estate for tax purposes and could therefore potentially give rise to extra inheritance tax.

appreciate them points as theres a lot to understand on this.

1. So in a scenario, currently living on main pension with a small income, withdraw maximum amount, pay the tax on it but don't make sure total income plus pension withdrawal doesn't push it to the next tax band (excluding the 25% amount as that is classed as separate), is that correct, and does the pension company deduct tax on withdrawal?

2. and what are the problems that can arise on point 2 other than hoping the council can sufficiently cover the living costs? if current income covers everything is that problem covered? just so I get the worst case scenarios

3. thanks and also if that scenario happens, is it correct there is a 3k tax free gift limit which can be deducted from whatever is gifted in both the 2 years split, to slightly reduce that tax bill so the 25% works out tax free, plus potentially 6k of the remainder as that is gifted (and potentially last years as no gift last year, this year can be 6k, and next year 3k tax free cash gift)

LHW99

3) If the parent dies within 7 years the gift would still form part of their estate for tax purposes and could therefore potentially give rise to extra inheritance tax

To be pedantic, it wouldn't be extra inheritance tax, it would just not save any IHT that would have been due on the estate had the gift not been made.

Also, I believe there is still a taper relief, so that there is some reduction in tax owed on a gift after ~3 years.

MallyGirl

point 2 is around deprivation of assets. If a person has given away significant assets and then needs to go into a care home the council can take into account those assets when doing means testing calculations.

https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/deprivation-of-assets/

Triumph13

LHW99 said:

3) If the parent dies within 7 years the gift would still form part of their estate for tax purposes and could therefore potentially give rise to extra inheritance tax

To be pedantic, it wouldn't be extra inheritance tax, it would just not save any IHT that would have been due on the estate had the gift not been made.

Also, I believe there is still a taper relief, so that there is some reduction in tax owed on a gift after ~3 years.

A common misconception. Taper relief only applies where the gift itself was over the IHT threshold.

Linton

brehom5 said:

Linton said:

brehom5 said:

in the UK, please can someone confirm if this method is correct if parent has a untouched pension pot that needs passing to an offspring

example:

73 years old, untouched pension amount total 60k

This needs going to offspring as gift

Withdraw 25% tax free, transfer straight to offspring

withdrawn 75% which is taxable, transfer straight to offspring

Is there any other way to cash in on this to reduce the 75% tax, and as it will be gifted, should offspring be aware of any tax implications or the parent gifting it e.g. if using it to buy a home or any other investment?

Also if theres an alternative method which makes more sense e.g. cash out 25% tax free but then set the offspring as a beneficiary, and the offspring withdraws it after that?

Any advice appreciated

Withdrawing the money from the pension paying the tax then gifting it is the only way to do what you want whilst the parent is alive. 

Some points:
1) Best to make the withdrawals over 2 years if an extra £45K income in a single tax year would put the parent into the higher rate tax band.

2) Making the gift could cause problems if the parent is expecting the local council to pay for future care needs or becomes bankrupt or dies leaving insufficient money to pay any debts.

3) If the parent dies within 7 years the gift would still form part of their estate for tax purposes and could therefore potentially give rise to extra inheritance tax.

appreciate them points as theres a lot to understand on this.

1. So in a scenario, currently living on main pension with a small income, withdraw maximum amount, pay the tax on it but don't make sure total income plus pension withdrawal doesn't push it to the next tax band (excluding the 25% amount as that is classed as separate), is that correct, and does the pension company deduct tax on withdrawal?

2. and what are the problems that can arise on point 2 other than hoping the council can sufficiently cover the living costs? if current income covers everything is that problem covered? just so I get the worst case scenarios

3. thanks and also if that scenario happens, is it correct there is a 3k tax free gift limit which can be deducted from whatever is gifted in both the 2 years split, to slightly reduce that tax bill so the 25% works out tax free, plus potentially 6k of the remainder as that is gifted (and potentially last years as no gift last year, this year can be 6k, and next year 3k tax free cash gift)

1) Yes the pension company will deduct income tax prior to paying out the money.  However they will deduct more tax than expected as this will be the first ever payment in a completely new income stream. This extra tax will need to be reclaimed from HMRC.  There is an ongoing thread on this matter.

https://forums.moneysavingexpert.com/discussion/6582585/how-does-emergency-tax-work#latest

2) Deprivation of Assets.  If the council believe the parent has impoverished themselves in order to get their care paid by the state they can calculate the care payments due assuming that the parent still has the money. If the parent has more than enough to pay for care costs themselves there is no problem.

On bankruptcy the creditors could ask the courts to undo the gift.

3)  No, the £3K tax free gifting is only relevent to subsequent inheritance tax after death if the parent dies within 7 years.  It does not affect the income tax due on withdrawals.

PS possibly misunderstood your question..  The £3K gift allowance could help reduce IHT if parent dies within 7 years of making the gift.