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Analysis of tax treatment of a pension pot
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Pension Pot 10,000
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IHT on death40%
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Tax free Cash (TFC)25%
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Option 1 Encash and donate more than 7 years before death
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Donor's tax rate20%40%45%
Note that a large pension encashment could result in multiple levels of tax being applied to parts of the withdrawal
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Tax free cash 2,500 2,500 2,500
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Taxable Pension 7,500 7,500 7,500
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Tax on Pension 1,500 3,000 3,375
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Net value of encashment 8,500 7,000 6,625
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IHT paid on net encashment000
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Net gift 8,500 7,000 6,625
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Income tax paid on encashment reduces total funds subject to IHT
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Option 2 Encash before death and retain funds
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Donor's tax rate20%40%45%
Note that a large pension encashment could result in multiple levels of tax being applied to parts of the withdrawal
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Tax free cash 2,500 2,500 2,500
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Taxable Pension 7,500 7,500 7,500
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Tax on Pension 1,500 3,000 3,375
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Net value of encashment 8,500 7,000 6,625
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IHT subsequently paid on net encashment
3,400 2,800 2,650
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Net gift 5,100 4,200 3,975
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Income tax paid on encashment reduces total funds subject to IHT
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Option 3 Pension passed on at death
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Recipient's tax rate20%40%45%
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IHT payable 4,000 4,000 4,000
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Net Gift 6,000 6,000 6,000
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Receiver tax rate20%40%45%
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Income Tax due when drawndown 1,200 2,400 2,700
Note that when receiver takes the inherited pension it contributes to their total annual income so may affect the tax band(s) that apply
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Net value on drawdown 4,800 3,600 3,300
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Funds subject to IHT is the full value value of the Pension
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Combined scenarios. Total 20k transferred; 10k during lifetime and 10k on death
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More than 7 years
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10k cash10,00010,00010,000
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Pension transferred on death 4,800 3,600 3,300
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Total avaiaible to recipient14,80013,60013,300
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Pension 8,500 7,000 6,625
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Cash on Death600060006000
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Total available to recipient 14,500 13,000 12,625
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Less Than 7 Years
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10k cash600060006000
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Pension transferred on death 4,800 3,600 3,300
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Total avaiaible to recipient1080096009300
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Pension 5,100 4,200 3,975
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Cash on Death600060006000
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Total available to recipient 11,100 10,200 9,975
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Outcomes are dependent on tax rates so look at likely tax rates
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