pension fund on reaching 75

[newlyretired]

A standard rate taxpayer has an uncrystallised pension fund of about £25K
What are the tax implications on reaching age 75 prior to drawing/cashing in the pension fund?
newlyretired

[paulnumbers]

Pre-75, if you die, the whole pension fund goes to the beneficiaries without tax taken off. Post-75, if you die, it is taxed, or put into a pension for them.

So, usually a good idea to take the 25% tax free once you hit 75, otherwise your beneficiaries will pay more tax. unless there are good reasons not to (inheritance tax for example, the pension pays outside of the estate)

Other than that, I don't think there's really any difference.

[newlyretired]

Thanks.
Is the 25% tax free still available after age 75?
newlyretired

[Chrysalis]

Yes, the 25% tax free does not disappear when you reach 75. Except if you die, then your beneficiaries pay tax at their income tax rate, and don’t get the 25% tax free. So probably a good idea to take it at 75 and give it to them if you don’t need it...

[ursaminortaur]

A standard rate taxpayer has an uncrystallised pension fund of about £25K
What are the tax implications on reaching age 75 prior to drawing/cashing in the pension fund?
newlyretired

Won't really affect you unless you have other pensions which have already been taken using up almost all the LTA limit* but there is an LTA test at age 75 which tests all remaining uncrystallised funds. If that test then takes you over the LTA limit then you will be subject to the LTA excess charge.

* Also If you had crystallised other pensions and put them in drawdown but not drawn down the growth that had accumulated since crystallisation then there is also an LTA test on that growth at age 75.

[mutantpoodle]

within this context......

if pension not taken when 75..and then die benefiiaries pay tax at their high tax rate...???

if they are 20% tax payers...do they pay tax at 20% on entire pot...or does it get treated a bit like salary...ie 20% up to £45k and so on?

******

also re Chrysalis....if you take the 25% and give the ebenifiaires the rest is that not a considered/treated as a 'PET'

[scrumpyjack]

AFAIW anything they draw from the pension is simply added to form part of their taxable income. No top slicing

Note that the pension they inherit from you does not form part of their lifetime allowance. It is in addition to their lifetime allowance. Also they can leave it undrawn and pass it on to their children as the law stands now. It can go on ad infinitum passing down the generations, though I can't see the law remaining unchanged for that long!

[ursaminortaur]

within this context......

if pension not taken when 75..and then die benefiiaries pay tax at their high tax rate...???

if they are 20% tax payers...do they pay tax at 20% on entire pot...or does it get treated a bit like salary...ie 20% up to £45k and so on?

******

also re Chrysalis....if you take the 25% and give the ebenifiaires the rest is that not a considered/treated as a 'PET'

If you took the 25% tax free lump sum and then gifted it to your beneficiaries then yes the gift would be treated as a PET.
If you took out more that would be taxed at your marginal rate. Although you could take it all out at once and then gift that and have it treated as a PET you would in drawing it out lose a lot in tax. Probably better to draw any taxable amounts out in smaller amounts over a number of years minimising the tax paid. Since such pension payments are considered income you could then gift them on a regular basis as gifts out of surplus income which like PETs avoids IHT but doesn't require you to survive for seven years.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/normal-expenditure-out-of-income-exemption/

Note. There is talk of Labour and Corbyn changing the rules on IHT and Gifts (in particular making gifts taxable with a lifetime limit) so although the law currently allows PETs and gifts out of Surplus income to bypass IHT it is far from certain what the position might be in the future.

[Chrysalis]

I see ursaminotaur has answered mutantpoodle’s query. Regarding the tax the beneficiaries pay, it depends on how they withdraw the funds and their other income.

One important thing to note is that what your beneficiaries are allowed to do with your pot depends on providers rules - ie they don’t have to provide the full range of possibilities. So for example if you leave an untouched pot, and your policy doesn’t permit beneficiary drawdown, then the beneficiaries will have a restricted range of options - probably either a lump sum (which as you point out may incur a hefty tax bill) or an annuity (taxable). Even if you have a drawdown arrangement, your provider may not necessarily allow that to be passed on as a beneficiary’s drawdown arrangement.
So, you should check how your existing providers allow death benefits to be taken. If you want your beneficiary to be able to continue with drawdown, check your provider permits it.