9 June 2011

Don't use your pension!

... until you are 75.

Just occasionally, a detailed legal judgement can have a big impact for quite a few people. That could apply to a recent case relating to pensions ("Fryer & Ors v HM Revenue & Customs" if you wanted to know!). To cut a long story short, from April 2011 the law has been changed so that any pension benefits which are not taken when they could be but are left as an investment to grow, no longer run the risk of being subject to Inheritance Tax.

The effect of that is that if you have enough assets (such as other investments or other pension income) so that you do not to need to take an income from a particular pension plan, then you are most likely to be better off leaving it for the time being. That pension plan will not be subject to Inheritance Tax, and, if you were to die prior to age 75, the whole of that pension plan could be passed on tax free to your beneficiaries.

Before you reach 75 it would probably make sense to (at least) take the tax free cash lump sum from the pension, because after 75 the remaining fund is subject to a 55% tax charge on your death.

It all goes to show that you shouldn't just do the obvious thing. Ask someone who knows!

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