Intelligent Pensions technical director David Trenner says clients should consider not taking the tax free cash lump sum if they do not need it.
He says the Government’s proposals to tax remaining funds on death in drawdown at 55 per cent will make it less attractive to take cash out of a pension and put it into a bank account.
Pension benefits drawn down under the new arrangements will continue to be taxed at income tax rates and the tax-free lump sum will continue to be available. Any unused funds remaining upon death will be taxed at 55 per cent if the individual is over 75. Death benefits for those who die before age 75 without having accessed their pension savings will remain tax-free, although the tax charge will apply if any of the pension is accessed.
Trenner says: “If you do not need your tax free cash, do not take it. You will be moving money from a tax sheltered environment into a bank account where any interest added will be subject to income tax.”
“Taking tax free cash will mean that instead of the whole fund being paid out free of tax on your death before 75, you will only be able to leave 45 per cent of the fund to your beneficiaries, with the taxman taking the rest.”