Pension Pot withdrawal.

peweuk

I have a pension pot that is still fully invested.
If I withdraw it as a lump sum I receive 25% free of income tax and the balance is taxed at my normal rate of income tax.
My request is for any clarification as to the tax situation applied to the fund if I die before withdrawing the capital.
The money would go to my wife as a capital payment, but would the proceeds be subject to tax, and if so how much of the fund (75% or all of it) would be subject to tax, and would it be income tax at her normal rate (ie some tax free, the rest at 20% once her personal tax allowance was exhausted.

DRS1

Depends when you die (pre or post 2027) and how old you are when you die (Below or over 75)

In any event the 25% TFLS does not survive your death.

Albermarle

Firstly it is normally inadvisable to withdraw pension pots in one go ( unless they are pretty small), as you will most likely get a very large tax bill. Normally it is much more tax efficient ( and generally a better plan) to take smaller amounts each year.

Then to your main question.
If you die before age 75, and assuming that your wife is named as the sole beneficiary of the pension, ( on the pension providers expression of wish form ) - she will be able to withdraw 100% of that pension tax free.
If you die at 75 or later, she will pay income tax on all withdrawals ( although she will still have her personal allowance, but the state pension takes most of that up nowadays) , regardless of if you had already taken the tax free cash or not.
It is a bit of an odd rule and there were some expectations it might have been scrapped in recent budgets, and may well be in a future one. 
Because of this rule it is normally advised to withdraw all the tax free cash before you reach 75.

peweuk

Albermarle said:

Because of this rule it is normally advised to withdraw all the tax free cash before you reach 75.

Why before 75. The tax free cash is still available to me for withdrawal after 75 - or is that not the case?after

MallyGirl

peweuk said:

Albermarle said:

Because of this rule it is normally advised to withdraw all the tax free cash before you reach 75.

Why before 75. The tax free cash is still available to me for withdrawal after 75 - or is that not the case?after

It is available to you but if you die a day after your 75th birthday then your beneficiary will pay tax on all withdrawals as the tax free aspect vanishes at 75

SouthCoastBoy

Once the IHT pension changes go through will it be a double whammy for those liable for IHT i.e. 40% IHT then marginal tax rate on any inherited pension?

dunstonh

peweuk said:

Albermarle said:

Because of this rule it is normally advised to withdraw all the tax free cash before you reach 75.

Why before 75. The tax free cash is still available to me for withdrawal after 75 - or is that not the case?after

We pretty much draw the whole 25% out at 75 (or the lead up to 75 if we know it will take multiple years to use ISA allowances.

There is no difference in charges on a SIPP and ISA, and they have the same investment choices.   So, moving the 25% to an S&S ISA by 75 is logical give the taxation differences on pre and post 75.       At age 75, whilst alive, the 25% TFC remains available.  But it is lost on death and any tax free cash not taken loses its tax free status.

Notepad_Phil

SouthCoastBoy said:

Once the IHT pension changes go through will it be a double whammy for those liable for IHT i.e. 40% IHT then marginal tax rate on any inherited pension?

Yes, but that's just the equivalent total as for other assets e.g. most people will have paid tax on their income before putting the money away into non-pension assets. So with a pension if you die over 75 then the money gets taxed and IHT on the way out, with e.g. an ISA or savings/investment account then it was taxed before it went in and then just IHT on the way out.

Plus the pension may have had 40% tax relief on the way in and just 20% or possibly even 0% marginal tax rate on the way out.

Albermarle

SouthCoastBoy said:

Once the IHT pension changes go through will it be a double whammy for those liable for IHT i.e. 40% IHT then marginal tax rate on any inherited pension?

It is highly unlikely that most people would be liable for 40% IHT on all the pension pot. Unless it was done deliberately, to avoid paying IHT on other assets. It might only be on a small portion of the pot if your total assets were not far above your nil rate bands.
Of course if you were one of the Top 0.1%, dying with assets worth multi Millions, you might end up paying it on the whole pot.  

SouthCoastBoy

So could end up paying 40% iht then 40% on the remainder. Gulp. When taking houses and other savings into consideration it doesn't take much to get to 2 million  especially if over the oncoming years the iht threshold doesn't get increased 

DRS1

SouthCoastBoy said:

So could end up paying 40% iht then 40% on the remainder. Gulp. When taking houses and other savings into consideration it doesn't take much to get to 2 million  especially if over the oncoming years the iht threshold doesn't get increased 

Why only 40% on the remainder?  Additional rate tax is 45%.