Life, death, pension and tax
Discussion
I'm in drawdown, + savings and ISAs. Wife has here own DB final salary pension, and pays tax at the basic rate.
I've been drawing down taxable bit just enough to keep under my personal allowance, the bulk is left to accumulate growth. (Once my state pension comes into play this will use up personal allowance) Topping up as required with untaxable portion or savings.
A) When I die is the taxable bit transfered wholesale (spouse is likely beneficiary)thus attracting higher rate tax?
B) Can she continue to drawdown and spread it to keep the income tax at the basic rate
If the answer is A) should I
1) Drawdown the taxable bit, pay now to avoid big income tax bills on my demise
2) Would an annuity be a more efficient route. Should I consider a joint annuity down the line or can she transfer funds to an annuity on inheritance?
Hopefully not imminent, just considering our future. I don't mind paying tax, everyone needs to do their bit, but want to do it efficiently.
TLDR
Should I get money out of my pension at a basic rate while I can?
I've been drawing down taxable bit just enough to keep under my personal allowance, the bulk is left to accumulate growth. (Once my state pension comes into play this will use up personal allowance) Topping up as required with untaxable portion or savings.
A) When I die is the taxable bit transfered wholesale (spouse is likely beneficiary)thus attracting higher rate tax?
B) Can she continue to drawdown and spread it to keep the income tax at the basic rate
If the answer is A) should I
1) Drawdown the taxable bit, pay now to avoid big income tax bills on my demise
2) Would an annuity be a more efficient route. Should I consider a joint annuity down the line or can she transfer funds to an annuity on inheritance?
Hopefully not imminent, just considering our future. I don't mind paying tax, everyone needs to do their bit, but want to do it efficiently.
TLDR
Should I get money out of my pension at a basic rate while I can?
Edited by PositronicRay on Saturday 23 December 09:19
If you die before 75 she gets the lot tax free. If after 75 she gets is but it's taxable when she choses to take it - so she can control how much to take & therefore what tax is payable. She won't get a 25% tax free element like you do though - it's all or none - regardless of what you have done.
If she then dies it is passed on under the same rules.
If she then dies it is passed on under the same rules.
You say you already have ISAs and savings so maybe not an issue but do you have enough outside the pension to cover major future expenditures eg. moving house, buying a car etc?
A little bit of drawdown now paying 20% tax might give you the funds to avoid maiing future drawdowns at 40% tax.
A little bit of drawdown now paying 20% tax might give you the funds to avoid maiing future drawdowns at 40% tax.
The oddity of the current tax system is it encourages retired people to spend their pension LAST, not first.
LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
Now the CGT annual allowance has all but disappeared old timers need to bear CGT particularly in mind if considering sale of unwrapped investments. Death isn't a CGT chargeable event, so it's a bit daft to pay 20% CGT followed by 40% IHT (total 60% tax) when the tax hit could have been limited to 40% IHT. (I know the arithmetic is more complicated than that but it makes the point.)
LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
Now the CGT annual allowance has all but disappeared old timers need to bear CGT particularly in mind if considering sale of unwrapped investments. Death isn't a CGT chargeable event, so it's a bit daft to pay 20% CGT followed by 40% IHT (total 60% tax) when the tax hit could have been limited to 40% IHT. (I know the arithmetic is more complicated than that but it makes the point.)
Panamax said:
The oddity of the current tax system is it encourages retired people to spend their pension LAST, not first.
LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
Now the CGT annual allowance has all but disappeared old timers need to bear CGT particularly in mind if considering sale of unwrapped investments. Death isn't a CGT chargeable event, so it's a bit daft to pay 20% CGT followed by 40% IHT (total 60% tax) when the tax hit could have been limited to 40% IHT. (I know the arithmetic is more complicated than that but it makes the point.)
Very true.LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
Now the CGT annual allowance has all but disappeared old timers need to bear CGT particularly in mind if considering sale of unwrapped investments. Death isn't a CGT chargeable event, so it's a bit daft to pay 20% CGT followed by 40% IHT (total 60% tax) when the tax hit could have been limited to 40% IHT. (I know the arithmetic is more complicated than that but it makes the point.)
I have an asset of significant value in my name which, if I wished to sell, the capital gain will be subject to CGT, and the amount of actual tax that will be paid is similarly very high. So, I have decided that I will not sell this asset and it will pass to my wife or son so that the capital gain for CGT will be reset to zero the date I die. No doubt, at some time a future government will seek to change this situation, but then I do not have too long to go......
R.
Panamax said:
The oddity of the current tax system is it encourages retired people to spend their pension LAST, not first.
LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
.)
Not sure I get this.LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
.)
EG taxable bit of pension, £10000 assuming same term and investment path
Remove from pension
10k
Less 20% tax
Invest balance £8k + 40% growth = £11200
Left in pension
£10000+40% growth= £14000, less 20% tax= £11200
Even stevens AFAICS; doesn't matter which way you cut it. (Just maximise personal allowance, isa allowance and avoid higher tax threshold)
or am i missing something?
Panamax said:
The oddity of the current tax system is it encourages retired people to spend their pension LAST, not first.
LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
<snip>
I'm a bit confused by this. I'm retired, with zero earned income and with around 5 years until I receive the state pension. I have substantial savings, a S&S ISA and my Aviva pension pot. It seems to me that avoiding tax, if possible, is the key issue. I require about £20,000 each year to cover spending (my wife still works part time). I have no assets that would trigger a capital gain.LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
<snip>
My current annual strategy is as follows:
- draw down £16,760 from Avivia (thereby using up my £12,570 allowance)
- top up from cash savings as needed, but aim to get £6,000 interest (hence all tax free)
- leave S&S alone until cash savings exhausted, which hopefully they won't be.
Hants PHer said:
Panamax said:
The oddity of the current tax system is it encourages retired people to spend their pension LAST, not first.
LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
<snip>
I'm a bit confused by this. I'm retired, with zero earned income and with around 5 years until I receive the state pension. I have substantial savings, a S&S ISA and my Aviva pension pot. It seems to me that avoiding tax, if possible, is the key issue. I require about £20,000 each year to cover spending (my wife still works part time). I have no assets that would trigger a capital gain.LeoSayer has drawn attention to making sure you don't pay "more tax later". That's important.
For many people (particularly substantial homeowners) the rudimentary order of spending may be,
Spend anything that's not in an ISA or SIPP spent first. (* See note below.)
Spend ISA next.
Spend SIPP last.
<snip>
My current annual strategy is as follows:
- draw down £16,760 from Avivia (thereby using up my £12,570 allowance)
- top up from cash savings as needed, but aim to get £6,000 interest (hence all tax free)
- leave S&S alone until cash savings exhausted, which hopefully they won't be.
tertius said:
I would mostly agree with that, though I suspect what you really mean is use "enough" of your pension to make use of your personal allowance (as it would be otherwise wasted) but leave the rest in the pension to grow and be protected from IHT.
Sorry, yes you're quite right. Since I have zero earned income, my annual draw down creates £12,570 of taxable income, thus ensuring my personal allowance isn't wasted. There is, of course, a large sum remaining in my Aviva pot. As you say, that remainder should grow and if I die before I'm 75 then Mrs. Hants will get whatever's in the pot, completely free of tax.Hants PHer said:
tertius said:
I would mostly agree with that, though I suspect what you really mean is use "enough" of your pension to make use of your personal allowance (as it would be otherwise wasted) but leave the rest in the pension to grow and be protected from IHT.
As you say, that remainder should grow and if I die before I'm 75 then Mrs. Hants will get whatever's in the pot, completely free of tax.The Leaper said:
Hants PHer said:
tertius said:
I would mostly agree with that, though I suspect what you really mean is use "enough" of your pension to make use of your personal allowance (as it would be otherwise wasted) but leave the rest in the pension to grow and be protected from IHT.
As you say, that remainder should grow and if I die before I'm 75 then Mrs. Hants will get whatever's in the pot, completely free of tax.PositronicRay said:
Not sure I get this, or am i missing something?
The point is about "income tax bands".If you have suitable headroom in the 20% tax band you might choose to draw pension of £5,000 a year for 10 years.
You receive in total £50k less 20% tax = £40,000 net
On the other hand, you might wait through nine of the ten years and draw the whole £50k in year ten. You'd get £5,000 of it at 20% tax but pay 40% on the rest.
£5k less 20% tax = £4,000
£45,000 less 40% tax = £27,000
You receive a net total of 4 + 27 = £31,000 and have the pleasure of paying an additional £9,000 in tax.
monthou said:
Which party is going to tax pension movements between spouses?
It's not just the movement that's tax free - if you die before 75, then the beneficiary can withdraw it tax free too.It wouldn't be an outrageous change to make the withdrawal subject to tax - even if the movement remains tax free.
Car bon said:
monthou said:
Which party is going to tax pension movements between spouses?
It's not just the movement that's tax free - if you die before 75, then the beneficiary can withdraw it tax free too.It wouldn't be an outrageous change to make the withdrawal subject to tax - even if the movement remains tax free.
The Leaper said:
This tax position will for not be around for much longer, I suspect; there's a GE coming up reasonably soon...
Any tax break, however small, should be used religiously while it's sitting in front of you.There will already be people kicking themselves for not using the significant annual CGT allowance while it lasted. £12,000 may not have sounded much but across a decade it adds up.
Last time they were in government Labour equalised the taxes on Income and Capital Gains. If CGT is increased to 30% or 40% there'll be a lot more people kicking themselves for not enjoying 10% or 20% while it lasted!
monthou said:
Car bon said:
monthou said:
Which party is going to tax pension movements between spouses?
It's not just the movement that's tax free - if you die before 75, then the beneficiary can withdraw it tax free too.It wouldn't be an outrageous change to make the withdrawal subject to tax - even if the movement remains tax free.
ds any more ideas!
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