My mother in law wants the pension to be safe, tax free and always accessible, where should she put the money?
30 January 2023
Question by Maria
Hi, I’m looking for some advice please.
My father in law recently passed away with a pension sum of approx 300K which has been left to his wife, my mother in law. She isn’t fussed about making lots of interest on it or investing it, she just wants it to be safe, tax free and always accessible, where should she put the money? I’ve looked at savings accounts and ISAs and they seem to have £ limits or restrictions. She also owns her home outright (value approx 400K). Are we right in thinking that when she passes, there would be no inheritance tax on the estate as her husbands allowance would add to hers and total 1 million?
https://www.moneysavingexpert.com/family/inheritance-tax-planning-iht/
Any help would be appreciated. Thanks Maria
Answered by Boring Money
Hi Maria
I'm sorry to hear about your father in law's passing.
Your mother in law has a decision to make here and ensuring she makes the right one can make a big difference to her long term financial security.
There are different types of pension, however I am going to make the assumption that what you are referring to is a 'drawdown' pension. This would mean it is invested and your father in law, when he was alive, could draw on it when he wished, and now as your mother in law has inherited it, she can do the same.
What she can do with it and how it might be taxed if she takes it out is dependant on the age your father in law was when he died. If he died before age 75, she can now take out as much as she likes (including all of it) tax free. If he died after age 75, what she takes out will be taxable as if it was her own earned income and subject to income tax.
Whether she should draw the money out and put it elsewhere, or keep it in the pension depends on a few factors; including her tax position, her income/expenditure position, her wider financial situation and her appetite for taking risk with the money.
You are right that ISAs have contribution limits of £20,000 each year, so it isn't really feasible to try and put this money from the pension into it quickly.
Moving money around is something you want to ensure you get right, as there can be tax consequences, such as when withdrawing and also tax allowances, such as where you end up putting the money and how it is taxed there.
In addition, you may also want to consider the longer-term inheritance tax implications of where it is held. Within a pension, such as a drawdown pension it is outside of your estate, whereas in something like an ISA or savings account it will be included in your estate and if you go above your total allowances, will be taxable.
When you look at this list of considerations as a whole you can see there is a lot to consider. What is right for your mother in law depends on entirely upon her circumstances and what she's trying to achieve with the money.
Because of this I think she should strongly consider getting financial advice to guide her to a suitable way forward.
As an adviser, this is of course something that I would be happy to discuss with her (and any family she would like present to help).
I hope the above information helps.
Jamie
