Transferring money: Is transferring money from your pension to an Isa a good idea after budget changes?
At the age of 64, I am investigating whether I can withdraw my pension by withdrawal.
Does keeping my pension pot in a pension scheme matter now that my pension pot will be included in my estate for inheritance tax purposes from April 2027?
Should I instead withdraw the amount each year to fund my lifestyle plus £20,000 to invest in an Isa until the pension pot is empty?
Tanya Jefferies from This is Money replies: Chancellor Rachel Reeves announced plans in the Budget to make pensions subject to inheritance tax from April 2027, along with other assets such as property, savings and investments.
This has disrupted many families’ plans to leave unused pots to younger generations.
Wealthy people could face a ‘double tax burden’ on inherited pensions of up to 70.5 percent under the new rules.
Many people like you are therefore looking for ways to protect their wealth under this future tax regime.
We will submit your question to an experienced financial expert, who will answer you below.
Ray Black, financial planner and director of Money Less Financial Services, answers: Even with the upcoming changes to inheritance tax from April 2027, keeping your money in a pension plan still has some strong benefits.
In your situation, taking money out of your pension and putting £20,000 into an Isa every year until the pot is empty might work, but there are some very important things to consider.
Ray Black: There’s a chance the new rules could be changed before April 2027, so it’s important not to have a knee-jerk reaction
The benefits of pensions
Tax-free growth: Like Isas, pensions allow your investments to grow tax-free while they are invested.
This means your money has a greater chance of increasing in value and increasing over time compared to regular taxable investments.
Manage tax on withdrawals: While Isas allow you to withdraw your money at any time tax-free, with pensions you can still withdraw 25 per cent of your pot tax-free.
Although the residual fund is taxed as income from the tax year in which it is withdrawn, you may still be able to withdraw that income in a way that helps minimize your tax bill and ensures that your money lasts.
If you were to withdraw large portions of your tax-free money, the amount left for future tax-free withdrawals decreases.
That’s why it’s important to carefully plan both tax-free cash withdrawals and earnings withdrawals.
Inheritance tax exemption between spouses: An important advantage of pensions is that when you die, your pension can be transferred to your spouse without having to pay inheritance tax, thanks to the inheritance tax exemption between spouses.
This means that pensions are still a good way for married couples to protect and pass on their assets between them in a tax-efficient way.
Inheritance tax thresholds: If you are married with children and intend to leave your main home to your direct descendants (children, stepchildren, grandchildren), your combined estate, including your pension, must be more than £1 million otherwise there can be no of inheritance tax.
This figure drops to £650,000 for married couples without children and £325,000 for singles without children.
For many people this means that even after the proposed changes to include pensions in estate calculations there will be no short or long term concerns anyway.
If your estate is large enough to attract inheritance tax, it is worth exploring strategies to reduce your family’s future inheritance tax burden, regardless of any estate tax changes that come into effect.
This should be carried out on a personal basis with a suitably qualified and experienced independent financial advisor
Take time to reconsider your position: It’s worth noting that these new rules won’t come into effect until April 2027.
This gives more than two years for further adjustments or even a reconsideration by the government based on public response and feedback from pension providers.
There is a chance that these rules could be changed, especially if they cause major concerns among savers. So it is important not to have a knee-jerk reaction in the short term.
Moving £20,000 a year from a pension to an Isa
Consider the following points before deciding whether this approach would work for you.
Balance between tax-free growth and tax payments: Both pensions and Isas allow your money to grow tax-free, as explained above.
Isas have the advantage when it comes to withdrawals as they are always tax free (under current rules).
With pensions you are 25 percent tax-free, but you pay tax on everything you take out afterwards. If you withdraw too much from your pension, you may pay a higher income tax rate. So it is important to plan ahead.
Investment options and costs: Isas are great for flexibility and tax-free income, but your pension may offer competitive rates and more diversified investment options.
It’s worth comparing how each option could impact your savings over time, and most importantly, don’t just take money from your pension and put it into cash-based Isas unless it’s money you expect to be issued in the short term.
Over the longer term, cash funds rarely manage to keep up with inflation, as we have all seen over the past 25 years.
Avoid knee-jerk reactions and plan carefully: Some people are concerned about possible tax changes and are considering withdrawing their retirement funds quickly.
However, hasty decisions can be costly. You need to think about your long-term needs and how best to secure your financial future, especially if you expect to retire long and healthy.
Keeping an eye on developments and being flexible in your financial plans can be very useful.
Speaking to an independent financial advisor can help you make informed choices that best suit you, your family and your financial goals.
Security and inheritance: Using your pension too quickly can mean that you have less money later in life.
Pensions have traditionally been a good choice 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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