Why you shouldn’t be spending your pension fund money when you retire

Yes, why shouldn’t be spending your pension fund money when you retire? That’s what you are meant to do surely? That’s was back then, this is now and here’s why.

If you delay spending your pension and spend other available cash and investments first, you could be keeping more of your money out of the hands of the taxman’s. If you are worried about the beneficiaries of your estate having to pay a big inheritance tax bill, not spending your pension fund money until you have to, could be a big help.

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Everyone’s situation is different, so, the following comments should only be considered as general guidance and taking professional financial advice is essential with this type of financial planning.

How does spending your pension last, help with Inheritance Tax?

Since the pension freedoms were introduced in 2015, many people are choosing to keep their pension invested using drawdown to provide an income rather than receive a guaranteed income from an annuity.

Pension savings held in an income drawdown account at retirement, will not be taxed unless you withdraw money as income.

You can take 25 per cent tax-free from your pension, but after that income tax is levied on withdrawals.

As the money held in a pension account, does not form part of your taxable estate under current legislation, this could reduce the amount of inheritance tax payable on your death. Beneficiaries pay no tax on the value in a drawdown account if you die before age 75, or the normal income tax rate of the beneficiaries if you are older than 75 when you die.

So, as you can see, you might want to consider using other assets first, before using your pension to provide income.

Obviously, this will not work for everyone, as your income needs must come first.

What order should you spend your assets when you retire?

  • Investments held outside ISA wrappers or other tax-efficient efficient investments. These can be used gradually, so that you can take advantage of the capital gains tax allowances over time.
  • Investment and cash Isas, except for those held in an AIM portfolio that may qualify for Business Property Relief.
  • Your home if it pushes your estate above £2 million, as downsizing and spending the money can cut your inheritance tax bill.
  • Investments with BPR status, which are shielded from inheritance tax if you have held them for at least two years by the time you die.
  • And finally, you pension money invested in an income drawdown account.

Most savers continue to view their pension as their primary income source in retirement, even though the new pension freedoms have changes this dramatically.

As you can see, this is not necessarily the most tax-efficient way to generating income, as other assets would be more effective.

It is also important to consider your wider financial position if inheritance tax is an issue for you. It is important for you should check that your pension scheme allows for ‘generational drawdown’, as many old-style pensions do not allow anyone besides your spouse to benefit from your pension.

If it is necessary you can convert a pension, that will facilitate drawdown and generational drawdown. An individual who has a pension that offers this facility can cascade their pension fund assets to their family, free of inheritance tax.

Retaining pension wealth outside of your taxable estate for inheritance tax purposes, where it could suffer a 40 per cent tax charge, is especially if other sources of assets can be used to fund retirement.

Action Call

Are you thinking about how to start taking pension income? Consider all your options and how that may affect any future Inheritance Tax liability.

If you would like to talk to about financial planning, please get in touch for a no-obligation meeting. Go to our website www.miadvice.co.uk and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.

Email us at financialplanning@miadvice.co.uk

It is advisable to take advice from a professional financial adviser when making major financial planning decisions.

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This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.

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