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Consider avoiding taking tax free cash, says Intelligent Pensions

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.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Is it not also proposed that this 55% will apply to those in USP under 75 at the time of death as well?

  2. David Trenner - Intelligent Pensions 20th July 2010 at 1:53 pm

    PP, That is exactly my point. By taking tax free cash at 60/65 you are creating a potential 55% tax charge on death before 75. Taking tax free cash might mean that your bank balance looks healthy, but it does not really make sense if you don’t need it.

    For Phased Withdrawals it will make sense to take maximum GAD from activated segments to avoid activating more segments. This will limit the tax on death before 75.

  3. I penned a light-hearted blog about the merits of taking a cash lump sum from pension benefits a couple of years ago and it seems to me that it’s still as relevant today.

    See: http://tinyurl.com/is-cash-best

    Mike Jones
    MyCompanyPension.co.uk

  4. David – agreed. Indeed, for someone over the new MIR, the best bet will be to empty segments completely as and when funds are wanted, 25% as PCLS and 75% as a single flexible drawdown payment.

    I’m not sure HMT has thought through the behavioural consequences of the tax on death lump sums being higher than tax on lifetime income.

  5. Good point David… I hadn’t thought of that and will now be adjusting my discusions with clients to reflect this.
    A very good reason for reading and participating in debates likle this on-line rather than simply reading a paper…..

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