Pension income is usually built up over a number of years, even decades, to help people during retirement cover the cost of living. But with increased difficulties brought about by the COVID-19 crisis, many older people are making the decision to redistribute their savings to assist others. HMRC data revealed 92,000 individuals aged 75 or over withdrew a cash lump sum from their pension in the year to June 30, 2020 – a 33 percent increase on the year before.
As such, many over 75s are choosing to withdraw money from their pension to gift to their relatives in a legal avoidance of tax.
Tim Holmes, Managing Director at Salisbury House Wealth, commented on the matter.
He said: “More and more over 75s are taking money out of their pension to help family members.
“With coronavirus hitting the younger generation hardest, we expect to see withdrawals rise even further.
“As property prices continue to climb, the Bank of Gran and Grandad is vital in helping millennials get a foot on the property ladder.
“There are taxable benefits for making an early withdrawal too.
“For pensioners concerned about their family being hit with a huge tax bill on their pension later down the line, withdrawing money now to gift to relatives could be a smart move.”
While Mr Holmes has acknowledge gifting could be a sensible solution for those who are still hoping to give money away, there are also rules to bear in mind here which relate to Inheritance Tax (IHT).
There is usually no IHT bill to meet on small gifts which are given out of a person’s normal income – such as Christmas and birthday presents.
Britons can give away £3,000 worth of gifts each tax year without these being added to the value of their estate in a process known as the ‘annual exemption’.
Unused annual exemption can be carried forward to the next year, but only for one year.
People will also be able to give wedding or civil ceremony gifts to family members – up to £2,500 for a grandchild, and £5,000 for a child.
Finally, as many gifts of up to £250 per person can be used in the tax year, as long as someone has not used another exemption on the same person.