Taking Max Lump Sum Available for IHT Purposes

Marcon

segovia said:

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.        

There is no such rule of thumb where a defined contribution scheme is concerned: the ratio is pre-set at 25% tax free/75% taxable. You can't draw down taxable cash without taking (or having taken) the appropriate amount of tax free cash. 

I think you're getting confused with defined benefit schemes, where the member usually has a say in how much pension they want to relinquish in exchange for a one-off tax free lump sum at the time they start to draw their DB benefits from the scheme. But again, there is no rule of thumb about what to do - it's more a question of deciding whether tax free cash + a lower pension will give a better outcome than a lower cash and a higher guaranteed future income stream. The decision has to be based on individual circumstances.

segovia

Marcon said:

segovia said:

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.        

There is no such rule of thumb where a defined contribution scheme is concerned: the ratio is pre-set at 25% tax free/75% taxable. You can't draw down taxable cash without taking (or having taken) the appropriate amount of tax free cash. 

I think you're getting confused with defined benefit schemes, where the member usually has a say in how much pension they want to relinquish in exchange for a one-off tax free lump sum at the time they start to draw their DB benefits from the scheme. But again, there is no rule of thumb about what to do - it's more a question of deciding whether tax free cash + a lower pension will give a better outcome than a lower cash and a higher guaranteed future income stream. The decision has to be based on individual circumstances.

Marcon said:

segovia said:

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.        

There is no such rule of thumb where a defined contribution scheme is concerned: the ratio is pre-set at 25% tax free/75% taxable. You can't draw down taxable cash without taking (or having taken) the appropriate amount of tax free cash. 

I think you're getting confused with defined benefit schemes, where the member usually has a say in how much pension they want to relinquish in exchange for a one-off tax free lump sum at the time they start to draw their DB benefits from the scheme. But again, there is no rule of thumb about what to do - it's more a question of deciding whether tax free cash + a lower pension will give a better outcome than a lower cash and a higher guaranteed future income stream. The decision has to be based on individual circumstances.

I replace rule of thumb with "best practice", it's considered best practice not to take maximum tax-free lump sum in one go unless your circumstance dictate it.     

Albermarle

segovia said:

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 

As far as I know there is no legislation planned to remove the age 75 rule.

There was speculation it might go ( especially as it is not very logical) but so far nothing has been announced. So far…..

segovia

Albermarle said:

segovia said:

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 

As far as I know there is no legislation planned to remove the age 75 rule.

There was speculation it might go ( especially as it is not very logical) but so far nothing has been announced. So far…..

I am sure it already has 

https://www.bbc.co.uk/articles/ckgley4qzn9o

Notepad_Phil

segovia said:

Albermarle said:

segovia said:

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 

As far as I know there is no legislation planned to remove the age 75 rule.

There was speculation it might go ( especially as it is not very logical) but so far nothing has been announced. So far…..

I am sure it already has 

https://www.bbc.co.uk/articles/ckgley4qzn9o

I think there's some confusion about what tax is being talked about, that page is talking about Inheritance Tax not how much tax is applied when you drawdown from an inherited pension, and that drawdown tax depends on whether the person was under or over 75 when they died and has not changed so far and there's been no mention of it changing.

Albermarle

segovia said:

Albermarle said:

segovia said:

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 

As far as I know there is no legislation planned to remove the age 75 rule.

There was speculation it might go ( especially as it is not very logical) but so far nothing has been announced. So far…..

I am sure it already has 

https://www.bbc.co.uk/articles/ckgley4qzn9o

You are not the first to mix up the change in IHT rules for pensions, with the rules about income tax for beneficiary pensions ( which have not changed - yet )
However they are two separate issues.