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Radical Changes on Pensions

Those looking to pass on their pension fund received a boost when the Government confirmed on 29th September their intention to abolish the current 55% tax charge on death from April 2015.  Currently, it is normally only possible to pass a pension on as a tax-free lump sum if you die before age 75 and you have not taken any tax-free cash or income. Otherwise, the fund is subject to a 55% tax charge if taken as a lump sum rather than as income.

However, as with all financial matters, the devil is in the detail. Even at this stage, full information is not available, but the main highlights of the forthcoming changes are outlined below. Your age at death will determine how your pension death benefits are treated.

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 pension funds you have triggered and those you have not yet triggered. Clients already using income drawdown will see their potential tax charge on death cut from 55% to zero overnight (after the new rules become effective).

Death after 75 – Defined Contribution Pension savers will be able to nominate who ‘inherits' their remaining pension fund. This fund can then be taken under the new pension flexibility (to be introduced from 6th April 2015) 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.

So what are the differences between the current situation and the proposed changes?

If you die BEFORE age 75

 

Old rules

New rules

Lump sum

Tax free or 55% tax if in drawdown

Tax free

Income

·         Taxed as income (via an annuity or drawdown) but can only be used by dependants, that is, some beneficiaries are excluded.

·         Tax free if taken via drawdown

·         Taxed as income if taken via an annuity

·         Available to any beneficiary

If you die AFTER age 75

 

Old rules

New rules

Lump sum

Subject to 55% tax

Subject to 45% tax (unless paid as income)

Income

·         Taxed as income

·         Option available only to dependants

·         Taxed as income

·         Option available to any beneficiary

Death benefits may be subject to a lifetime allowance tax charge.

Making instructions known
It will become even more important that death benefit instructions are in line with your wishes. A nomination or expression of wish will help to guide the plan trustees when you die. If there are no instructions in place, you will be relying on the pension scheme trustees to second guess your intentions and your pension might not be treated the way you want it to be treated.


This is only a summary of the main highlights and more information, particularly details of how this will work in practice, will be announced in the Autumn Statement on 3rd December. 


If you require any further information or help with this complex area, please contact robinson+co’s Chartered Financial Planner, Jenny Armstrong on 01900 603623 or jennyarmstrong@robinsonco.co.uk


*Your ‘marginal’ tax rate is calculated according to the different rates of income tax and the cut off levels for each band of income tax.  An inherited pension fund, when added to your earned income might be partly in the basic rate tax band and partly in the higher rate tax band.


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