Choosing how to phase benefits
Since 6 April 2016, any tax charge due on a lump-sum death benefit is at the recipient’s marginal rate of income tax unless the funds are paid to a trustee or personal representative, in which case the special lump sum death benefits tax charge of 45% applied. This only applies when the member dies after age 75.
Therefore, the decision to phase the drawing of retirement benefits rather than crystallise the entire fund into drawdown is now more likely to be based on income tax considerations and whether or not the MPAA would be an issue.
It may also be influenced by the individual’s IHT situation and desire (or otherwise) to reduce their taxable estate by as much as possible prior to death, while preserving the IHT efficient pension for the use of future generations.
Question - Use Your Note Taker To Jot Down Ideas / Calculations
Sarah, who is 61, retired in March 2015. The only income she has in 2018/19 is from her ISAs and she is not yet entitled to her State Pension.
She has a personal pension fund valued at £320,000 and she needs a £10,000 lump-sum payment, net of tax, in 2018/19. Which of the following options will ensure that she pays no income tax in 2018/19, and also leave as much of her fund as possible uncrystallised so as to provide further PCLS in the future?
a) Crystallise £40,000 and take a PCLS of £10,000 and no income.
b) Crystallise £10,000 and take £2,500 as PCLS and £7,500 as income.
c) Crystallise £12,000 and take £3,000 as PCLS and £7,000 as income.
d) Crystallise £10,000 and take it all as a PCLS.
B)
Sarah can take 25% of the amount crystallised as PCLS and designate the remaining funds to flexi-access drawdown. Alternatively, she can take an UFPLS for £10,000, of which 25% will be tax free. The remaining £7,500 (whether she opts for flexi-access drawdown or taking an UFPLS) will also be tax free as she has no income subject to tax in the current tax year (as her ISA income is tax free) and therefore the £7,500 will fall within her personal allowance.
Option A also gives Sarah a payment of £10,000 as the whole payment will be tax- free. Because the whole payment is PCLS, it will reduce the amount of PCLS available to her in the future (the balance of £30,000 would have to be placed into a flexi- access drawdown plan, although Sarah would not need to draw any funds from the plan if she did not wish to).
Option C will mean Sarah is crystallising more than she needs to and so does not meet her objective of leaving as much as possible uncrystallised (although the PCLS plus the payment from the flexi-access drawdown plan would all be tax free as Sarah would still have her whole personal allowance available).
Option D is not possible as this would mean Sarah is taking 100% of the amount crystallised as PCLS.