Ask Rosie: Is taking a £100,000 tax-free cash from my pension a wise decision?
In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot Financial Planning and has over 25 years of experience in the financial services industry. If you have a financial question for her, feel free to email us at [email protected].
Question: I’m contemplating withdrawing £100,000 tax-free cash from my pension, which is the maximum amount I can take. This decision is prompted by the anticipated changes to inheritance tax rules concerning pensions. I’m considering gifting this amount to my son for a house deposit. Is this a prudent move?
Answer: Given the upcoming changes to pension regulations, it’s completely understandable to be concerned about the potential implications on inheritance tax (IHT) liabilities. Your idea of withdrawing your entire tax-free cash (TFC) to assist your child with a house deposit is certainly generous, but it’s crucial to evaluate whether this is the best course of action for your long-term financial well-being.
First and foremost, while pension regulations are set to change in April 2027, with pensions being subjected to IHT, these changes are not set in stone. It’s possible that the alterations could be postponed or modified. Nonetheless, if the anticipated changes take effect, pensions would no longer be as advantageous for passing on wealth. Presently, most pensions are exempt from IHT, as they are considered outside your estate for tax purposes. However, post-April 2027, they would be included in your estate and could be liable for IHT.
This reality underscores the importance of reviewing your estate planning strategies. Withdrawing large sums of money now could inadvertently lead to unexpected tax ramifications, so it’s vital to proceed with caution.
If your intention is to utilize the funds during your lifetime, it would be wise to consider a strategic withdrawal approach. Instead of taking the entire tax-free lump sum in one go, a more gradual withdrawal strategy could serve you better. For example, withdrawing 5 percent of your pension each year allows the remaining funds to remain invested and potentially grow, providing you with greater flexibility over time. Opting for a lump-sum withdrawal could result in missing out on significant compounding growth, which can have a substantial impact in the long run.
When it comes to gifting, it’s essential to understand the implications of such actions. Gifting £100,000 to your children for a house deposit is certainly feasible, but this will be classified as a Potentially Exempt Transfer (PET).
- This means that if you survive for at least seven years following the gift, it will be excluded from your estate for IHT purposes.
- However, should you pass away before this period, the gift could still be included in your taxable estate, depending on how long you live after making the gift.
If your goal is to transfer wealth to your children while retaining some control over the assets, you might want to explore the option of utilizing an offshore bond within a discretionary trust. This setup would allow the funds to be invested while remaining outside your estate for IHT purposes. Alternatively, a loan trust could be beneficial, where the investment’s growth remains outside your estate while you retain access to the original capital, which is treated as a loan.
Moreover, if your children are minors, additional considerations arise. Gifting substantial sums to minors can come with legal and financial ramifications, and placing the funds into a trust may be a more prudent approach to protect their interests. There’s also the risk of unforeseen life events, such as divorce or creditor claims, which could adversely affect the amount of gifted money your children ultimately retain.
It’s equally important to assess whether you can afford to make such a gift while ensuring your own financial security remains intact. Withdrawing a significant sum from your pension reduces its capacity for growth, which could potentially influence your retirement income. While TFC from a pension is not classified as income, regular pension withdrawals that are subject to income tax could qualify for the “normal expenditure out of income” exemption for IHT purposes, provided they are executed regularly and do not diminish your standard of living.
Consequently, depending on your specific circumstances, structuring your pension withdrawals carefully could present a more tax-efficient avenue for wealth transfer without adversely affecting your estate for IHT purposes.
In conclusion, before making any major financial decisions, it’s crucial to weigh all your options thoroughly. You may discover that a staggered approach to withdrawals and gifting offers you greater flexibility while keeping your estate planning aligned with your goals.
