We helped our client, a beneficiary of their father’s pension fund, to receive these benefits in the most tax-efficient way possible, minimising the potential large amounts of income tax.
Sadly, our client passed away at the age of 79. We had previously advised them to complete a pension drawdown nomination form, and they had elected their partner, son and daughter to receive these funds.
The son wished to take his benefit in the form of a lump sum death benefit, equating to £60,000.
As our client passed away over the age of 75, the death benefit is taxable at the beneficiary's marginal rate.
Therefore, the lump-sum would be added to the son’s other income in the tax year, and he would be taxed accordingly.
The son had a salary of £40,000. This meant if he had taken the lump sum of £60,000, he would have paid £22,000 tax in total (£10,000 at 20% plus £50,000 at 40%), giving him a net benefit of £38,000.
Instead, we advised that the son should use inherited drawdown; which is taxed only when the beneficiary withdraws an income from their inherited fund.
Using inherited drawdown, the son withdrew £10,000 per annum over six years. This meant no higher income tax was payable (£60,000 at 20% = £12,000).
By advising the son to use inherited drawdown, we saved him a significant £10,000 in tax, allowing the son to receive more of his father’s hard-earned pension benefits.
Inherited drawdown provides beneficiaries with the ability to spread tax over many tax years. The beneficiary has the control to withdraw monies when they wish, and this flexibility can help utilise tax allowances and limit the amount of tax payable.
This case illustrates the importance for clients to have nomination forms for their pension funds, to ensure these benefits are passed onto the people they wish, and to update these when circumstances change.
Don't hesitate to contact a member of our team to talk about your personal circumstances.