Pension drawdown and inheritance tax implications
While the changes to pension regulations have awarded investors total freedom as to how they take their pension, due consideration must be given as to how that will affect a person’s inheritance tax (IHT) position.
The changes made in April 2015, which scrapped restrictions on how much income can be drawn from pensions, are now being widely used, with many pension holders taking advantage of the new rules through drawing down significant sums of money.
While this is seen as a very welcome introduction by many people, we would advise that before making a decision, people should give consideration to how it will affect their IHT liabilities.
Pension funds are generally IHT exempt, but any capital that is withdrawn from a pension pot then becomes liable to IHT. This means that, depending on the sums of money involved, you could be taxed at up to 40 percent.
Through careful planning and consideration, you can decide on your best course of action, allowing you to make the draw down from your pension you want, while remaining as IHT efficient as possible.
We would advise speaking to a specialist Wills and Probate advisor to clarify your position before making a decision.