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16 February, 2015   |   By David Trenner - New Model Adviser   |   Market News


Reducing income trims tax by tidy sum

Pension ‘death tax’ abolition, gifting rental property and reducing Sipp withdrawals allows 68-year-old Craig to save on taxes, meet his income needs and still pay for luxuries, writes David Trenner of Intelligent Pensions.


Craig retired in 2005 aged 58 with around £400,000 in his Sipp and elected to take phased income drawdown.

Over the past 10 years he has taken instalments of tax-free cash and the maximum associated drawdown from his plan.

His state pension commenced three years ago and he reduced his drawdown withdrawals accordingly.

His wife Ailsa will receive her state pension from March 2015. 

The couple’s house is worth £600,000 and there is no mortgage outstanding.

When Ailsa’s state pension payments start, they will have combined state pensions of £15,000 per annum.

They also have rental income from a buy-to-let property of £9,000 per annum after tax and expenses, and Ailsa’s teacher’s pension of £16,000 per annum net of tax.

These incomes will, they believe, meet most of their annual requirement of around £45,000 during their retirement years.

Craig’s current Sipp fund is £350,000, of which £150,000 remains unvested.

He is trying to decide whether he should now take advantage of the pension freedoms, announced by chancellor George Osborne in his 2014 Budget and coming into force this April, to take his full fund as a lump sum.

He would like to keep some of the money in the bank to meet additional income requirements, such as a holiday for his forthcoming golden wedding anniversary, and gift the balance to his son and grandchildren, as it is important to him to help his family financially.


If Craig takes his Sipp fund as a lump sum, he will be liable to taxation of around £135,000, as he will lose his personal allowance, thereby making his state pension taxable.

With his income exceeding £150,000, he will be an additional rate taxpayer for the first time in his life.

Were he to die in the next seven years, there would be a further tax charge because the gifts he made would be potentially exempt transfers for inheritance tax (IHT) purposes. 

Also, the rental property would be part of his estate.

Craig could withdraw, say, £25,000 per annum from the fund and only pay basic rate tax on it.

After replacing the rental income and making up his and his wife’s income needs, he could gift the balance to his family every year.

This would create ‘gifts out of normal expenditure’, with no IHT implications.

Death tax deals an advantage

The abolition of the pension ‘death tax’ also offers a tax-efficient way of dealing with the fund.

If Craig withdraws only enough to meet his income needs, if he dies before age 75 the remaining fund could be paid tax free to any nominated beneficiaries.

If he lives beyond age 75, the remaining fund could provide income to his beneficiaries that would be taxed at their marginal rates.

For his grandchildren this could mean payments of £10,000 per annum (2014/15) that used up their personal allowances and would therefore be tax free.

Craig makes arrangements to gift the rental property to his son.

The value has risen slightly since it was purchased, but Craig and Ailsa can use their capital gains tax (CGT) allowances and so no tax is payable.

The rental income allows their son to remain a basic rate taxpayer.

Enough income

Craig now plans to take £17,000 per annum gross from his Sipp, partly in instalments of tax-free cash, to meet his income needs.

The fund should grow a little each year, but will not create an IHT problem on his death, or on Ailsa’s death had he left it to her.

Although he does not expect to need additional income, he can always dip into the Sipp to meet cash requirements as they occur.

He has never regarded himself as wealthy, but realises that taking advice has saved him thousands of pounds in taxes.

David Trenner is technical director at Intelligent Pensions