Taking Max Lump Sum Available for IHT Purposes

segovia

This is a hypothetical scenario......... 

We are generally advised not be tempted to take the whole amount of available tax-free amount from our pension pots. However, if you have combined assets worth circa 3 million (SIPP and Property), you and your spouse are aged 70 and have not started any drawdown would taking some max tax-free cash be beneficial to reduce IHT liabilities?  One daughter aged 30 not yet on the property ladder.       

QrizB

In your position I'd be trying to give it to my child as soon as I realised that I wasn't going to need it myself. Not just the TFC but however much of the rest that I could get out without paying HR tax.

Keep_pedalling

Time to do some serious gifting and spending I think. So yes, no point in dying having not touched your pensions. 

squirrelpie

segovia said:

would taking some max tax-free cash be beneficial to reduce IHT liabilities?

Maybe I'm being dumb, but how would taking tax free cash reduce IHT liabilities?

Albermarle

squirrelpie said:

segovia said:

would taking some max tax-free cash be beneficial to reduce IHT liabilities?

Maybe I'm being dumb, but how would taking tax free cash reduce IHT liabilities?

In itself it would not.
However if you want to gift it, or spend it ( both of which reduce IHT) then you would have to take it out of the pension first.

Smudgeismydog

Pensions are due to fall within your estate for IHT purposes from 2027, so by accessing (and spending/gifting) your tax free cash will reduce the value of your estate, and potential IHT liabilities.

LHW99

Presumably because leaving it in the pension would trigger 40% IHT unless directly to spouse. and then for death after 75 drawdown is taxed at beneficiaries' income tax rate, and any remaining TFLS is lost?

dunstonh

We are generally advised not be tempted to take the whole amount of available tax-free amount from our pension pots.

Let me rephrase that for you:
We are generally advised not to be tempted to withdraw the entire tax-free amount from our pension pots unless there is a suitable justification for doing so.

squirrelpie

I agree that spending money, thus removing it from your estate, will reduce IHT. But giving it away to charity will bizarrely increase IHT, or rather it will fail to reduce IHT as it would if it was left to charity in the will instead. At present, taking tax free money from a pension will bring extra money into your estate and increase IHT; after 2027 it will make no difference.

segovia

squirrelpie said:

segovia said:

would taking some max tax-free cash be beneficial to reduce IHT liabilities?

Maybe I'm being dumb, but how would taking tax free cash reduce IHT liabilities?

You get relief up to 1million if assets also include and home you are passing to your children, anything over 1million is liable to 40% IHT. However, if the estate is more than 2 million then I believe the thresholds are reduced. In a nutshell you don't want to leave more than 1 million. Therefore, to get assets out of a pension pot in the most tax efficient way is to initially take the tax-free lump sum and give it away. This contradicts the general rule of thumb which advises not to take the max tax-free lump sum.        

segovia

LHW99 said:

Presumably because leaving it in the pension would trigger 40% IHT unless directly to spouse. and then for death after 75 drawdown is taxed at beneficiaries' income tax rate, and any remaining TFLS is lost?

I think the age 75 rule has gone now, from 2027 everything is taxable no matter what your age