Pension death benefits – you can take it or leave it!
Those looking to pass on their pension fund received a boost recently when the Government confirmed they’re following through on their promise to scrap the current 55% tax charge on death. This means the tax system will no longer penalise those who draw sensibly on their pension fund, making pensions a very attractive wealth transfer wrapper.
Your age at death will still determine how your pension death benefits are treated. The 75 threshold remains, but with some very welcome amendments.
- Death before 75 – The pension fund can be taken tax free, at any time, whether in instalments, or as a one-off lump sum. This will apply to both crystallized and un-crystallized funds, which means those in drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide beneficiaries with a sustainable stream of income allows it to potentially grow tax free, while remaining outside their estate for IHT.
- Death after 75 – DC Pension savers will be able to nominate who ‘inherits’ their remaining pension fund. This fund can then be taken under the new pension flexibility and will be taxed at the beneficiary’s marginal rate as they draw income from it. Alternatively, they’ll be able to take it as a lump sum less a 45% tax charge.
These new rules will apply to payments made on or after 6 April 2015 rather than the date of death. So where payment of death benefits can be delayed until after 5 April 2015, the beneficiaries will be able to take advantage of the new rules.
The changes can be summarized as follows:
Death pre 75
|Old Rules||New Rules|
|Lump Sum||Un-crystallized funds – tax freeCrystallised funds – 55% tax||All Tax Free|
|Income||Option only available to dependantsTaxed as income||Tax free if taken via new flexible incomeOption available to any beneficiary|
Death post 75
|Old Rules||New Rules|
|Lump Sum||Subject to 55% tax||Subject to 45% tax|
|Income||Taxed as incomeOption only available to dependants.||Taxed as incomeOption available to any beneficiary|
All eyes on 3rd December It’s worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3rd December. We’ll provide updates on the final pieces of the pensions reform jigsaw, as it all starts to slot into place. Watch this space.
Source – Standard Life – Information correct at 07/10/2014
If you would like to discuss the impact of these changes please do not hesitate to get in touch with Mike.