Flexible income route 'can reduce inheritance tax bill'

by Sarah Ashcroft

Pensioners should think about going down the flexible income route when making a will in order to reduce their inheritance tax bill, it has been claimed.
People who are eligible for flexible income drawdown on their pension savings can use the scheme to "significantly reduce" their inheritance tax liabilities, according to investment specialist Skandia.

In order to qualify for flexible income, a secure pension provision of £20,000 a year is required by the individual. The flexible income can then be used to provide unlimited access to the rest of their money.

Legislation limits the amount of money a person can take each year under capped income. This is the key reason, says Skandia, why flexible income could be more tax efficient than capped income.

The limit is calculated as a percentage of money in drawdown. Due to the 15-year gilt yield reaching record lows, more money needs to be moved into drawdown to provide the desired net income. The problem, says Skandia, is that money held in drawdown waiting to be taken as an income is subject to a 55 per cent tax charge when the person dies, significantly denting the amount they leave in their last will and testament.

Flexible drawdown was introduced in April of last year. Being still fairly new, there is only a limited number of providers offering it.

Adrian Walker, Skandia's pension expert, comments: "Wealthy individuals could consider using flexible drawdown as a way to deliver retirement income more efficiently from their unused pension savings, avoiding a potential 55 per cent tax liability if they die before age 75.

"It is surprising the difference using flexible income over capped income can have from an estate planning perspective."

Currently, any protected rights cannot be included in the provision of flexible drawdown. From April 6th 2012, however, protected rights will be abolished, which will result in more people being able to use flexible drawdown.

Published on: February 2, 2012

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