Q. I am in receipt of a final salary pension which used all of my Lifetime Allowance when I took benefits two years ago. I also have a retirement annuity policy relating to a period of self-employment in the 1980s. I put very little into it so was pleasantly surprised to find it now has a value of £22,000. I would like to take these benefits under the new pension freedom to fund a holiday, or maybe two, and was wondering what the tax situation will be. I am a higher rate taxpayer.
A. Firstly, the pleasing size of the fund is a testament to the beneficial effect of time and the compounding of returns on any portfolio. If you draw the benefit as a lump sum, the amount you are allowed tax-free is usually restricted to 25% of your remaining Lifetime allowance, or nil. There would also be a tax charge of 55% if the whole fund is taken as a lump sum, as you have no remaining Lifetime allowance. However there is also something called the “small pots rule”. If you transfer the fund to a personal pension, it is possible to structure the fund as three smaller arrangements. You are allowed to fully surrender up to 3 “small pots” of up to £10,000 without reference to your other pension savings and the Lifetime Allowance. Such a full surrender would allow 25% of the plan value to be tax-free, with the balance added to your taxable income for the year and taxed under PAYE, meaning a likely effective tax rate of 30% on the full fund. Not all providers’ systems can structure the new plan in this way, so it is important to choose the right one, and I would recommend taking the advice of a chartered financial planner to help you with the transaction. Then enjoy your holiday!
Q. I am a widow and have decided that I have more money in savings than I need. I would prefer to see my three daughters enjoy this money while I am still alive rather than after I have died. My pension income is comfortably more than I spend each month, and since I live in rented accommodation my landlord is responsible for any repairs to the property and keeps it in good repair. I would therefore like to give them each £10,000, keeping around the same amount for myself. I understand that I can give away up to £3,000 each year without any inheritance tax being payable, but am not sure what the position is with regard to the balance?
A. As it sounds like your estate is well below the “nil rate band” of £325,000, inheritance tax is not likely to be an issue. You are correct in saying that it is possible to give away up to £3,000 each year (and use last year’s allowance if it was not used), but this may not be relevant to you. Any excess would be a “Potentially Exempt Transfer”, meaning that if you survive seven years from the date of the gift, it becomes exempt. If you die within the seven years, then it would use part of your nil rate band, leaving less for the remainder of the estate. However if this is still within the £325,000, no tax is payable. (If your late husband did not use any of his nil rate band, then you can also use the unused percentage of his allowance). It sounds as though you will be well within this threshold. Of more relevance may be the situation if you were to require long term care. The local authority would assess your care needs and also your ability to pay for the costs of care. The vast majority of your income would be used, and if you have capital of more than £14,250, some of the remaining cost would be met from your own capital. Over £23,750 of capital, all of any remaining cost is met from your funds. There are, however, rules against “deliberately depriving” yourself of capital to ensure you qualify for local authority assistance. If you were to go into a care home having just given money away, the local authority may consider that you have done this purely to avoid having to pay your own way. The longer the time between the gifts and any assessment, and the better your health at the time of the gift, the easier it would be to argue that avoiding liability for the care fees was not your purpose. The £3,000 annual exemption relates only to inheritance tax, and is not relevant in considering liability for the costs of care.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
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