How to avoid 55% Pension Death Tax Reply


‘Worrying’ numbers of people are not using their pension savings efficiently leaving potential inheritors liable to a hefty tax, according to Skandia.

Adrian Walker, Skandia’s pension expert said: “The number of people currently in drawdown and not taking an income highlights just how many people could benefit from further financial planning.”

Skandia data shows 59% of customers in capped drawdown are not taking an income. In these cases customers have taken the maximum tax-free lump sum and have left the rest of their fund invested.

The remaining pension fund is technically in ‘drawdown’, even though the customer is not taking an income. This means the remaining pension fund is subject to a 55% tax charge if paid as a lump sum to a beneficiary on the member’s death.

For those who die below age 75, this tax charge was increased from 35% to 55% in April 2011. Skandia has said many people will be unaware of this.

So what action do you need to take to stop this happening once you have retired:
If you are under 75:
  • Phase the amount you move into drawdown, many SIPP’s are structured with this in mind and you can use the tax free cash to help with immediate income needs
  • Consider reinvesting income in drawdown back into the pension to get tax relief, this reinvestment will not be deemed to be in drawdown
  • If you receive £20000 or more guaranteed pension per year, you qualify for flexible drawdown which helps you move money out of the 55% tax charge faster than capped drawdowns

If you are over 75:

  • Work with your advisor to access as much of your pension as possible and move it out of the 55% tax charge

steve@bicknells.net

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