Clients who are using the pension for IHT - When do you take the lump sum?


I think it has always been common knowledge that you should leave the pension fund untouched if you do not require it.

However, I was thinking about this and if you die after 75, 100% of the drawdown pot will be subject to income tax at the beneficiary's marginal rate.

So the client ends up losing out on their tax-free lump sum. Would it not be better to take the lump sum and gift it to an individual or trust? This way, your beneficiaries would only pay income tax on 75% of the pot.

The obvious issue is that if the client dies before 75, 100% of the pot is exempt from tax. So the above planning strategy isn't effective.

So would you wait until 75 to take the lump sum, but this means you would need to live until 82 for a successful PET/CLT.

I was wondering how other advice firms approached this issue? Do you encourage these clients to take the lump sum much earlier? But doesn't that mean the funds spend less time in the CGT exempt wrapper?


  • My view is you should start moving the tax free cash when you know you are definitely using it for the family. Barring illness or accident most people live to after 75, so pre 75 tax free loss is only a potential downside and that can be explained and balanced against the upside.

    There are non pension CGT exempt wrappers too! An offshore bond would give the same return as the pension but only have marginal rate tax on any growth instead of on all the money. ISAs and or the beneficiaries own pension or ISA would probably return more money.

    As the tax outside the pension will only be on the growth not on all the money, so probably not that big a deal, the family will be richer.

    Finally, if IHT is in play then if you phase the tax free cash over 5 or 6 years or more you should be able to avail of the normal expenditure out of income exemption.

    Customer outcome is obviously key and if the money is definitely to be passed on and is nto required and there are no life shortening illnesses etc the pension probably isn't the best place the money can be. So "when" doesn't matter.

    That's just my thoughts - be interesting to know what advice policy actually is in firms.

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