The government’s big budget shake up of pensions has potentially created an entire new level of freedom and income flexibility in retirement. It also presents a whole new perspective for inheriting pensions and inheritance tax planning for retirees with larger pension pots.
Greater number of retirees choosing drawdown
It is highly likely that the removal of compulsory annuity purchase will lead to a greater number of retirees choosing a drawdown style pension that allows them to take an income directly from their fund. With these changes more pension wealth than ever will be potentially passed down to loved ones on death and its vital to plan for this in advance and reduce any tax.
How these death benefits may be taxed will hinge on the governments review of the current regime. Any “uncrystallised” fund where the benefits have not been taken can pass to the estate of the deceased without a tax charge. Where a tax free lump sum has been paid then this “crystallised” fund is subject to a 55% tax charge if the remaining money is paid out as a lump sum on death.
If death occurs after age 75 and the surviving spouse wanted to take the uncrystallised fund as a lump sum (including any of the unused tax free cash allowance) it would all be subject to the 55% recovery charge that applies to crystallised funds at any time after age 55.
For many spouses this charge already acts as a deterrent from taking the lumps sum option, opting to continue to receive an income from the fund with it taxed against their own personal allowance. But what about those who already have a sustainable income or wish to pass the money onto their children?
The government has stressed the