Draw down pension before 2027

bellybuttonfluffman

Dear Pension Experts,

I am a 75-year-old widower with no partner. My total estate, including my private pension, is likely to exceed £500,000 when I die.

Assuming I live until at least April 2027, it seems to me that my private pension may then become subject to Inheritance Tax (IHT).

To reduce the potential IHT liability for my daughters, would it be wise to start drawing down as much of my private pension as I can each tax year between now and 2027 — while staying within my current tax bracket to avoid higher income tax rates?

I would be grateful for any thoughts or advice on whether this strategy makes sense, or if there are better options to mitigate IHT on my pension.

Many thanks in advance.

Marcon

bellybuttonfluffman said:

Dear Pension Experts,

I am a 75-year-old widower with no partner. My total estate, including my private pension, is likely to exceed £500,000 when I die.

Assuming I live until at least April 2027, it seems to me that my private pension may then become subject to Inheritance Tax (IHT).

To reduce the potential IHT liability for my daughters, would it be wise to start drawing down as much of my private pension as I can each tax year between now and 2027 — while staying within my current tax bracket to avoid higher income tax rates?

I would be grateful for any thoughts or advice on whether this strategy makes sense, or if there are better options to mitigate IHT on my pension.

Many thanks in advance.

Did your late wife's will use up the whole of her nil rate band? If not, and assuming your estate includes a property which you will leave to your daughters, that could be up to £1m before IHT becomes payable (£325K x 2 + £175K x 2). See https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

Are you sure you aren't getting so focussed on tax that you're letting that cloud all other issues? You are concerned about staying within your current tax bracket, but if you drawdown more of your pension so that you have to pay higher rate tax on some of it, does that really matter so much in the overall scheme of things? If yes, then perhaps drawdown more of the tax free element if you've not already taken the whole 25% tax free.

Flugelhorn

bellybuttonfluffman said:

Dear Pension Experts,

I am a 75-year-old widower with no partner. My total estate, including my private pension, is likely to exceed £500,000 when I die.

Assuming I live until at least April 2027, it seems to me that my private pension may then become subject to Inheritance Tax (IHT).

To reduce the potential IHT liability for my daughters, would it be wise to start drawing down as much of my private pension as I can each tax year between now and 2027 — while staying within my current tax bracket to avoid higher income tax rates?

I would be grateful for any thoughts or advice on whether this strategy makes sense, or if there are better options to mitigate IHT on my pension.

Many thanks in advance.

I am sure that someone will know the right answer to this but I think your late wife's IHT allowance would be transferred to you? Meaning it would be more like £1 million

Marcon

Flugelhorn said:

bellybuttonfluffman said:

Dear Pension Experts,

I am a 75-year-old widower with no partner. My total estate, including my private pension, is likely to exceed £500,000 when I die.

Assuming I live until at least April 2027, it seems to me that my private pension may then become subject to Inheritance Tax (IHT).

To reduce the potential IHT liability for my daughters, would it be wise to start drawing down as much of my private pension as I can each tax year between now and 2027 — while staying within my current tax bracket to avoid higher income tax rates?

I would be grateful for any thoughts or advice on whether this strategy makes sense, or if there are better options to mitigate IHT on my pension.

Many thanks in advance.

I am sure that someone will know the right answer to this but I think your late wife's IHT allowance would be transferred to you? Meaning it would be more like £1 million

Depends if it was used at the time of her death (eg if she left money to the daughters).

bellybuttonfluffman

Thanks for the replies Marcon and Flugelhorn.

Sorry but my mention of 'widower' was not strictly accurate. My wife and I divorced before she passed away, so there was no longer any financial connection.

btw, if I go ahead with drawing down my pension, I will only draw an amount that will keep me in the lower tax bracket.

coyrls

Drawing money from your pension will not in itself have any effect on your liability for IHT.  If you spend the money or give it away your IHT liability will be reduced (subject to the seven year rule for gifts).

Marcon

bellybuttonfluffman said:

Thanks for the replies Marcon and Flugelhorn.

Sorry but my mention of 'widower' was not strictly accurate. My wife and I divorced before she passed away, so there was no longer any financial connection.

btw, if I go ahead with drawing down my pension, I will only draw an amount that will keep me in the lower tax bracket.

That limits your options.

Do you give to charity now, in which case you could draw down a bit more and then claim higher rate relief on charitable donations (to the extent you would otherwise have had to pay higher rate tax)?

Do you plan to leave any charitable bequests in your will?

bellybuttonfluffman

Thanks Marcon. I do give to charity regularly, but I don't have any bequests in my will.

BTW: I spoke to two IHT/pension advisors. One said wait until the next tax year before making a decision. The other thought drawing down my pension each years was a good idea.

Anyhow, I've now given instructions to my financial advisor to draw only enough to keep me in the lower tax bracket this year, and I'll either spend it or gift it to my daughters.

Thanks to everyone for your advice.

dunstonh

BTW: I spoke to two IHT/pension advisors. One said wait until the next tax year before making a decision. The other thought drawing down my pension each years was a good idea.

Anyhow, I've now given instructions to my financial advisor to draw only enough to keep me in the lower tax bracket this year, and I'll either spend it or gift it to my daughters.

The general guidance I have read the most is to do nothing at the moment in terms of the taxable element unless its a very large pension fund.   However, you should take out the 25% TFC to feed into ISAs.     Wait until the consultation and final outcome is out (in case that closes actions and retrospectively applies rules)

Taking the basic rate band, gifting to children (under the gift from income rule) and your children putting it into their pension, leaves it neutral.  (possibly better than natural if higher rate tax relief is available).

You have to gift or spend to reduce the tax liability.   Just taking it out of the pension isn't going to help apart from the 25% TFC.