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Beneficiaries will pay just marginal income tax rates when they withdraw the income if the person who dies is over 75 No tax will be paid at all if the person who dies is under 75 Pensions can be passed on to grandchildren as well So what is changing?
The Chancellor announced at the Tory Party Conference that the 55% tax charge currently applicable to pensions on death will be scrapped. The changes will take effect from 6th April 2015. For pension savers, age 75 still remains a pivotal age, as this will determine how pension death benefits will be paid.
What are the rules which come into effect from 6th April 2015 in respect of drawdown?
|Date of death||Format of benefits||Tax position||Can be paid to|
|Before age 75||All benefits||Tax-free||Any beneficiary|
|From age 75 onwards||Lump sum (paid out of the scheme)||45% (taxable at marginal income tax from 2016/17 onwards)|
|Income (continuation of drawdown)||Taxable at marginal income tax|
Death before age 75
With the current regime those that have crystallised their pension benefits and die prior to age 75, have the choice on death of passing their fund to a financial dependant, or paying a lump sum less 55% tax. Only spouses and financially dependent children under the age of 23 are exempt from the 55% tax, paying a marginal income tax rate when they draw down the pension as opposed to taking it as a lump sum.
However under the proposals, for death before age 75 – the pension fund can be taken tax free and this will apply to both crystallised and un-crystallised funds. This change will mean for those in drawdown their potential tax charge on death reducing from 55% to NIL.
Death after age 75
With the current regime those with crystallised funds who die post age 75, have the choice on death of passing their fund to a financial dependant, generally only their spouse, or paying a lump sum less 55% tax.
However, under the proposals, post age 75 nominated beneficiaries will be able to access the funds in a flexible manner as drawdown pension, paying income tax at their marginal rate of income tax. Alternatively it can be taken as a lump sum taxed at 45%, then from 2016/17 it will be taxed at marginal income tax rate.
These are significant changes which are beneficial to people saving in pensions now and to try and encourage others to start saving into their retirement fund. Individuals can now build up their pension fund in the knowledge that they can pass on money to immediate family or next generation without the punitive 55% tax charge.
While most individuals will not surprisingly pick up on the ‘tax-free’ aspect for those who die before age 75, this should be treated with some caution, as statistically a large percentage of people will live post age 75, so there will still be an element of income tax to be paid.
Keeping up-to-date records
It is also strongly suggested that everyone should complete an expression of wish or death nomination form for each of their pension plans, which highlight who they would like to receive any death benefits, and make sure it is kept up-to-date. This will help providers and scheme trustees make appropriate choices when the new rules come into force. It is also suggested that a copy of the document is kept with your will.
Further details of how these proposals are to be managed and administered will be provided on the 3rd December 2014 when the Government announce the Autumn Statement.
If you would like to know more about the impending changes then please contact Kerry Houghton by email firstname.lastname@example.org or by phone 01772 5550614.