Pension fund tax free lump sum then drawdown.

Tax_Slave

I have two finals salary pensions and on death my wife will get 60% of them.
My wife will also inherit my pension fund of £270,000 (current valuation) that is untouched.
This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.
We have own house worth about £500,000 with no mortgage.
Savings and  investments come to about £250,000 ish at current state.

My wife will get a full state pension in 8 years time.
Wife also has a pension fund of £80,000 untouched.
Wife’s current income is zero and she has given some of her tax allowance to me.
(£1257).

In order for my wife to avoid future taxation on the taxable 75% of her pension pot we are considering the following;
Year 1 - Drawdown 25% tax free lump sum (£20,000) plus £11,000 (within tax allowance) = £31,000 tax free.
Year 2 - Drawdown £11,000 (within tax allowance)
Year 3 - Drawdown £11,000 (within tax allowance)
and so on until pension pot is Zero.

We will invest all withdrawals into a joint names ISA (So allowance is £20,000 each = £40,000 and covers £31,000 for year 1)….then £11,000 a year after that.

Thus when wife starts to claim state pension she will not pay tax on the 75% of pension fund that’s taxable during drawdown.

Does above make sense?

Marcon

Fingers crossed for the medical miracle...

Are your two final salary pensions already in payment?

Albermarle

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

Tax_Slave

Marcon said:

Fingers crossed for the medical miracle...

Are your two final salary pensions already in payment?

Yes, currently being paid.

Tax_Slave

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

DRS1

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

DRS1

Presumably your savings and investments are all in ISAs?  Not in her name making use of personal allowance and nil rate savings bands?

Have you worked out what rate of tax she will be paying when getting the state pension and the widows pensions?  Might she get into higher rate tax?  Might there be a case for drawing more in the near term paying a bit of 20% tax to stave off a higher rate later?

Tax_Slave

DRS1 said:

Tax_Slave said:

Albermarle said:

This will be tax free as I will die before age of 75 unless there is a medical miracle cure to my blood cancer.

I guess you do not need any bad news, but there is a possibility of this age 75 rule being abolished at some point.
Just idle speculation, and it not advised to act on speculation, but best to be aware of it at least.
In fact it was expected to be changed at the last budget, but the IHT status of pensions was changed instead.

If the pre 75 rule changes, will the pension become part of my estate on death?
ie Now liable to IHT.
If so then surely my wife will inherit tax free as she will savings and my half of house?
Spouses don’t pay IHT on wife’s/husbands estates.

I think he means it could be subject to income tax (just as it would be now if you died after 75).  No spouse exemption for income tax.

I’m a bit confused;
If pensions are counted as inheritance and liable to IHT, then why would she pay income tax on inheritance?
ie The rules change due to below …
At the moment I understand people pop money into pensions so children can inherit it tax free if you die prior to 75 and making it part of estate liable to IHT put a stop to this.

It can’t be both surely?
Aka at Death prior to 75 or any age, on inheritance you are now as a child liable to income tax and IHT on same pension pot of say £275,000. 

In the case of a spouse liable to taxation and then IHT at zero rate (due to being a spouse)l

Tax_Slave

DRS1 said:

Presumably your savings and investments are all in ISAs?  Not in her name making use of personal allowance and nil rate savings bands?

Have you worked out what rate of tax she will be paying when getting the state pension and the widows pensions?  Might she get into higher rate tax?  Might there be a case for drawing more in the near term paying a bit of 20% tax to stave off a higher rate later?

DRS1 said:

Presumably your savings and investments are all in ISAs?  Not in her name making use of personal allowance and nil rate savings bands?

Have you worked out what rate of tax she will be paying when getting the state pension and the widows pensions?  Might she get into higher rate tax?  Might there be a case for drawing more in the near term paying a bit of 20% tax to stave off a higher rate later?

That’s a good  point.
I would have to do the maths.

QrizB

Tax_Slave said:

We will invest all withdrawals into a joint names ISA (So allowance is £20,000 each = £40,000 and covers £31,000 for year 1)….then £11,000 a year after that.
...
Does above make sense?

Do joint ISAs even exist? The I stands for Individual, after all?

Tax_Slave

QrizB said:

Tax_Slave said:

We will invest all withdrawals into a joint names ISA (So allowance is £20,000 each = £40,000 and covers £31,000 for year 1)….then £11,000 a year after that.
...
Does above make sense?

Do joint ISAs even exist? The I stands for Individual, after all?

Just asked ChatGPT and you are correct. I just took it for granted they existed. Either way she can pay £20k into hers and the other £11,000 into mine year one.