George Osborne’s announcement removing the so called ”death tax” on SIPP Drawdown Plans builds further on the new flexibility and options announced in this year’s Budget and brings into sharper focus the relative merits of Drawdown and ISAs when planning for retirement, writes Mark Soper.

On the death of the plan holder a SIPP Drawdown fund is normally free of IHT when paid out to a nominated beneficiary as a lump sum and from next April such a payment will also be free of the 55% death tax, irrespective of whether any income has previously been withdrawn from the fund and where the plan holder dies before reaching age 75. Where the plan holder dies after reaching age 75, the fund remains free of IHT but there is a tax of 45% (reduced from 55%) on any lump sum paid out and this tax rate is being revised again from April 2016.

In summary, tax relief is given on amounts (within certain limits) paid into a SIPP Drawdown plan and from next April , the plan holder can receive from age 55 a tax-free lump sum of 25% of the fund (this may be phased-in over time) and the remaining fund can be withdrawn as a single or a series of lump sums or as a regular income – all such withdrawals will be liable for income tax at the plan holder’s marginal rate of tax.

On the plan holder’s death, the remaining fund value may be passed to any nominated beneficiary as a lump sum, normally free of IHT or the beneficiary can continue the Drawdown Plan in his or her own name.

It is often overlooked that the ‘tax free” status of an ISA/NISA is completely removed on the death of the investor and the Government has no plans to change this. Investments paid into an ISA/NISA do not attract any tax relief but the ISA fund created may be withdrawn as a regular income or in one or a series of lump sums from any age and completely free of any income tax liability whilst the investor is alive.

On the investor’s death, the ISA ‘wrapper’ is lost and its value will be added to the deceased’s estate and this may be liable for IHT.

RetireEasy stongly recommends all investor’s to seek professional and independent advice before investing in any retirement plan.