Updated 25th November
Chancellor George Osborne has announced the removal of the 55% tax that applied potentially on death to defined contribution pension funds. This follows on from his radical proposals to allow unrestricted access to pension funds from next April. These changes are to be welcomed, are more generous than expected and further increase the attractiveness of pension saving.
What are the proposed changes?
Until now, if you"crystallised" your pension savings – in other words, you had started to take benefits from your pension either as a lump sum or income – you faced a 55% tax on any remainder of those savings that you passed on after death.
The Chancellor is now proposing that from April 2015 you won't be penalised for starting to delve into your pension savings. The punitive 55% rate is removed: whether crystallised or not, pension funds are treated the same. The sole distinction in terms of tax is now whether you die before or after your 75th birthday.
In the event of death prior to age 75, any remaining funds can be passed to a nominated beneficiary which can be taken as a tax-free lump sum. Alternatively, the recipient can leave the assets within the pension environment where they can continue to benefit from tax-free growth and an exemption from Inheritance Tax. They can then take a tax-free income as and when required.
If you are 75 or older when you die, then the fund passes to your beneficiary with no immediate tax charge. While withdrawals can be taken at any age, these are liable to income tax at the recipient's marginal rate. It will also be possible to take the whole fund as a lump sum, subject to a 45% tax charge (though the Chancellor proposes that this lump sum tax will also move to the recipient's marginal tax rate from April 2016).
It is worth noting that any potential Lifetime Allowance charge on death will still apply and that these changes will have no direct effect on any defined benefit pension. For those who purchase an annuity with their pension savings, these changes will only have an impact on the small number who buy a value protected option. It is also important to note that under the current system a spouse or dependent child could draw an income from the fund without incurring an immediate 55% tax charge, but this charge would eventually have been levied once the fund passed out of their hands.
How do these changes affect any decisions I may take?
- Pension saving in general becomes more attractive with the removal of the punitive 55% tax charge.
- Pensions become more attractive as a"family savings" vehicle for passing monies down the generations.
- Savers can now plan a drawdown from their pensions without having to worry about any tax charge should they die before their 75th birthday.
- The changes also pose some questions for people with defined benefit pensions. They may want to consider weighing up the merits of a defined benefit plan, which has the relative security of providing an index-linked pension, against a defined contribution pension that has become more flexible with reduced tax charges. Any transfer from one to the other is a complex decision, and not one to be taken lightly.
Our guidance to clients
It is important to remember that these changes are still only proposals to take affect from April 2015, and that further detail is yet to come (we expect more at the Autumn Statement on 3rd December).
On a standalone basis, these latest proposals would encourage savers to leave funds within their pension until their death. This is potentially at odds with the previously announced increased flexibility to draw funds from a pension without limit. However, what is clear is that all of these changes introduce more strategic options for maximising the long-term value that can be extracted from a defined contribution pension. It will be incumbent on all to review their retirement strategy in light of these changes, and we will be happy to offer advice around this.
For more information on how these changes might benefit you, or for details of how Tcam can help you plan for your financial future, please contact us.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.