Moving money: Is transferring cash from your pension to an Isa a good idea after Budget changes
At 64, I’m looking into taking my pensions via drawdown.
Now that, as of April 2027, my pension pot will be included in my estate for inheritance tax purposes, is there any advantage for keeping it in a pension plan?
Should I instead draw down annually the amount to fund my lifestyle plus £20,000 to invest in an Isa until the pension pot was empty.
Tanya Jefferies, of This is Money, replies: Chancellor Rachel Reeves announced plans in the Budget to make pensions liable for inheritance tax like other assets such as property, savings and investments starting from April 2027.
This has upset many families’ plans to bequeath unspent pots to younger generations.
Wealthy people could face a ‘double tax hit’ on inherited pensions of up to 70.5 per cent under the new rules.
Many people like you are therefore casting around for ways to protect their wealth under this future tax regime.
We put your question to an experienced financial expert who answers you below.
Ray Black, chartered financial planner and managing director of Money Minder Financial Services, replies: Even with the upcoming inheritance tax changes from April 2027, keeping your money in a pension plan still has some strong advantages.
In your situation, taking money from your pension and putting £20,000 each year into an Isa until the pot is empty could work, but there are some really important things to keep in mind.
Ray Black: There’s a chance the new rules could be modified before April 2027, so it’s important not to have a knee jerk reaction
The advantages of pensions
Tax-free growth: Just like Isas, pensions allow your investments to grow tax-free while they’re invested.
This means your money has a greater chance of compounding in value and increasing over time compared to regular taxable investments.
Managing tax on withdrawals: While Isas let you take out your money tax-free at any time, pensions still allow 25 per cent of your pot to be withdrawn tax-free.
Whilst the residual fund is taxed as earned income in the tax year that it’s withdrawn, potentially you can still withdraw that income in such a way to help minimise your tax bill and help to ensure that your money lasts.
If you were to start taking out large chunks of your tax-free cash, the amount left for future tax-free withdrawals decreases.
Therefore, it’s important to plan both tax free cash and income withdrawals carefully.
Spouse-to-spouse inheritance tax exemption: A key benefit of pensions is that when you pass away, your pension can be passed over to your spouse without them having to pay inheritance tax, thanks to the spouse-to-spouse inheritance tax exemption.
This means for married couples, pensions are still a good way to protect and pass on wealth tax-efficiently between them.
Inheritance tax thresholds: If you’re married with children and plan to leave your main home to your direct descendants – children, step children, grandchildren – your combined estate including your pension will need to be above £1million for inheritance tax to be an issue.
This figure drops to £650,000 for married couples with no children and £325,000 for single people with no children.
For many people, this means that even after the proposed changes to include pensions within the inheritance calculations, there will be no immediate or long term concern anyway.
If your estate is large enough to trigger inheritance tax, it’ll be worth exploring strategies to reduce your family’s future inheritance tax liability, irrespective of the changes to inheritance tax coming into force.
This should be conducted on a personal basis with a suitably qualified and experienced independent financial adviser
Take time to review your position: It’s worth noting that these new rules won’t take effect until April 2027.
This gives over two years for further adjustments or even a rethink by the Government based on public reaction and feedback from pension providers.
There’s a chance these rules could be modified, especially if they cause significant concern among savers, so it’s important not to have a knee jerk reaction in the short term.
Moving £20k a year from a pension to an Isa
Consider the following points before making up your mind whether this approach would work for you.
Balancing tax-free growth and tax payments: Both pensions and Isas let your money grow tax-free, as explained above.
Isas have the edge when it comes to withdrawals since they’re always tax-free (under current rules).
Pensions give you 25 per cent tax-free, but you’ll pay tax on anything you take out after that. If you withdraw too much from your pension, you might pay higher rate income tax, so it’s important to plan ahead.
Investment options and charges: Isas are great for flexibility and tax-free income, but your pension may offer competitive charges and more diversified investment options.
It’s worth comparing how each option could affect your savings over time, and most importantly don’t just take money out of your pension and put it into cash-based Isas unless it’s money you are expecting to spend in the short term.
Over the longer term, cash funds rarely manage to keep up with inflation, as we have all witnessed over the last 25 years or so.
Avoid knee-jerk reactions and plan carefully: Some people feel anxious about potential tax changes and consider withdrawing their pension funds quickly.
However, hasty decisions can be costly. You should think about your long-term needs and how to best secure your financial future, especially if you expect to live a long and healthy retirement.
Keeping an eye on developments and being flexible with your financial plans can be very helpful.
Talking to an independent financial adviser can help you make informed choices that will work best for you, your family and your financial goals.
Security and legacy: Using your pension too quickly might leave you with less money later in life.
Pensions have traditionally been a good bet for long-term savings and a tax-efficient way to pass wealth to your family.
A balanced approach that considers both pensions and Isas could be a better strategy.
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