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Pension v ISA after age 75

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I am aged 73 receiving state pension. I have previously cashed in a small personal pension pot and I also have an untouched DC pension which I no longer pay into worth about £110,000. I understand that if I’m lucky enough to die after I turn 75 (2027) this will be part of my estate for IHT purposes AND my spouse will pay tax on this pension at her applicable tax rate (20%).


We do not have the funds available for paying into ISAs.


I’m thinking that as I’m not using all of my income tax personal allowance (and even if I were) we would be better off if I withdrew lump sums over the next couple of years to pay into our ISAs (40,000) as this would effectively not be taxed under the Additional Permitted Subscription rule. Also future growth would be tax free.


Have I got my thinking correct? Are there any pitfalls.


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Comments

  • eskbanker
    eskbanker Posts: 37,259 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Are one or both estates likely to have an IHT liability?
  • MallyGirl
    MallyGirl Posts: 7,217 Senior Ambassador
    Part of the Furniture 1,000 Posts Photogenic Name Dropper
    edited 2 August at 5:12PM
    I think you should withdraw the 25% tax free amount before you turn 75 as a minimum 
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  • ali_bear
    ali_bear Posts: 341 Forumite
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    edited 2 August at 6:58PM
    As MallyGirl says, take the TFLS now and draw down the rest as you can without paying any 40% tax on the income. Store the moneys in ISAs. Or draw down at a slower rate. 
    A little FIRE lights the cigar
  • squirrelpie
    squirrelpie Posts: 1,387 Forumite
    Eighth Anniversary 1,000 Posts Name Dropper
    I'm confused by the mention of the "Additional Permitted Subscription rule". I'd never heard of it before (shame on me!) but it only seems to affect events if/when one of you were to die. So I'm not sure why it's important for your plan? It's just the means by which one partner inherits the other's ISA AFAICT?
  • fuzzzzy
    fuzzzzy Posts: 161 Forumite
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    I'm confused by the mention of the "Additional Permitted Subscription rule". I'd never heard of it before (shame on me!) but it only seems to affect events if/when one of you were to die. So I'm not sure why it's important for your plan? It's just the means by which one partner inherits the other's ISA AFAICT?
    Any growth within the ISA would be tax free for the remaining partner, whereas within the pension any growth would be taxable when drawn.
  • zagfles
    zagfles Posts: 21,479 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    There's no IHT on the pension if it goes to your spouse. It might make sense to take the TFLS and also to draw enough taxable income to at least use up your personal allowance. 
  • SweetnSavvy
    SweetnSavvy Posts: 727 Forumite
    Part of the Furniture Combo Breaker
    eskbanker said:
    Are one or both estates likely to have an IHT liability?
    Borderline, I would think.
  • SweetnSavvy
    SweetnSavvy Posts: 727 Forumite
    Part of the Furniture Combo Breaker
    Thank you all for your replies. I think I’m going to take either as much as possible without triggering higher tax rate (UFPLS) or TFLS under drawdown

     Is UFPLS the way to go? Or drawdown? I’m thinking that UFPLS might trigger wrong tax by HMRC which I would need to reclaim later.
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 17,626 Forumite
    10,000 Posts Fifth Anniversary Name Dropper
    Thank you all for your replies. I think I’m going to take either as much as possible without triggering higher tax rate (UFPLS) or TFLS under drawdown

     Is UFPLS the way to go? Or drawdown? I’m thinking that UFPLS might trigger wrong tax by HMRC which I would need to reclaim later.
    HMRC won't deduct any tax, the pension company does that.

    For a first taxable payment they will use the emergency tax code, 1257L, so assuming your pension company uses operates a monthly payroll process there would be no tax deducted unless the taxable amount exceeded £1,048.
  • Albermarle
    Albermarle Posts: 27,946 Forumite
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     I understand that if I’m lucky enough to die after I turn 75 (2027) this will be part of my estate for IHT purposes AND my spouse will pay tax on this pension at her applicable tax rate (20%).

    Any unused pension will be included in IHT calculations as from 2027, regardless of what age you die. ( although as mentioned if your spouse is still alive it will pass to them without any IHT, presuming you have named them as a beneficiary) 

    The age 75 rule only applies to whether income tax is payable on withdrawal by the beneficiary, which is a separate matter.
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