George Osborne has announced the abolition of the 55% tax charge payable on certain 'pension pots' on death, which will directly affect pensioner members of defined contribution pension schemes and their beneficiaries.
This change has been widely anticipated, with an announcement expected to come in the Chancellor's Autumn Statement, although many thought Osborne would bring the tax in line with the 40% inheritance tax charge rather than removing it altogether.
Changes proposed from April 2015
Members of defined contribution pension schemes will be able to pass on relevant ’pension pots’ to beneficiaries in a more tax efficient manner. The changes outlined by Osborne mean:
- before age 75, where an individual dies with a drawdown account or with uncrystallised funds, they will be able to pass on the remaining funds to any beneficiary tax free (provided it is taken as lump sums or through a flexi access draw down account).
- at age 75 or over, individuals will be able to pass on relevant funds to any beneficiary, who will be taxed at their marginal rate of income tax (so either 0%, 20%, 40% or 45% depending on the income of the beneficiary), or at a rate of 45% if the money is taken as a lump sum.
In either case, the member is able to leave value to any beneficiary, whereas historically it has been spouses, civil partners and dependent children under the age of 23 who have benefited from tax relief. This reform will therefore give more flexibility to pension savers, for example grandparents who wish to leave their unused pension to their grownup children or grandchildren.
This reform will take effect from April 2015, alongside the other pension changes announced in the Budget 2014.
Until now, if a member died at age 75 or over and had funds in a drawdown account, or if their funds remained uncrystallised, a 55% tax charge applied to those funds. Where a member died before age 75, a 55% tax charge applied if they had funds in a drawdown account. The tax charge was only reduced to a beneficiary's marginal rate of income tax in the case of a spouse, civil partner or dependent child under the age of 23.
The cost of this reform to the Treasury is expected to be in the region of £150 million per annum; however, it brings the treatment of unused pension pots more into line with the other flexibilities introduced by the Budget earlier this year, and may act as a further incentive to pension savers.
Author: Hannah FacerThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.