Stand-out Q – nominee on partner’s pension…
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A client is a nominee of their husband’s pension. Should they withdraw funds from this before their own pension?
The income tax position on income withdrawals for a dependant, nominee or successor depend upon the age of the previous pension holder at their death. Where they were under the age of 75, the dependant, nominee or successor can withdraw funds free of income tax.
Where a member is both a beneficiary of a pension fund and a pension member in respect of their own pension savings, there can be an income tax advantage of withdrawing funds as a beneficiary where the funds have been inherited from a member under the age of 75 at death.
Anna has a crystallised pension fund of £300,000 in her own name and has inherited pension savings of £300,000 from her husband. Her husband was under the age of 75 at his death, so Anna can make withdrawals free from income tax.
Anna needs £20,000 of net income each year to maintain her standard of living, and her other income totals £11,850. She therefore needs to withdraw £20,000 from her husband’s pension, but £25,000 each year from her own pension.
If Anna survives for 10 years, how have the pension funds been affected by these withdrawals? We will ignore any growth and increases in tax bands during the period.
On Anna’s death, both her drawdown funds will be treated the same way, as it is her age which will determine the income tax treatment for her beneficiaries.
If Anna’s husband had been on or over the age of 75 at his death, there would be no benefit to taking income withdrawals from her husband’s pension first, as Anna’s income tax liability would be the same.
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