Changes to pension rules over money left in your fund when you die could save you tax, says Tax Tips & Advice. Until 6 April this year, the tax charge on pension funds transferred on death was 35% of the fund value where the transfer occurred before any pension was drawn, and 75% after. Now a single rate of 55% applies.
But if you have other pension income of at least £20,000 before tax and are aged 55 or older, you can take as much as you like from your fund. Anything over the 25% tax-free amount is taxed in the year you receive it, so draw the fund over a few years and pass the money onto your heirs.
Say Bob has a fund of £500,000. He takes £125,000 tax free (25%), uses £200,000 to buy a pension of £14,000 a year and puts £175,000 into a flexible drawdown fund. He takes £17,500 a year, taxed at 20%, leaving £14,000, which he gives to his two sons. His total tax on that £175,000 is £35,000. Had he left the money in his fund, the 55% tax charge at the time of death would be £96,250, leaving his sons £78,750.
Seek professional advice before trying this scheme.