What is the position today?
Under current legislation, on your death your pension fund will attract tax at either nil, 25% or 55%, depending on your age and whether you have drawn benefits from your defined contribution pension.
Why the change?
In March, the Chancellor promised a review of the taxation of pension funds on death following his relaxation of pension income rules scheduled to commence in April 2015.
When will the new rules start?
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 next step is to analyse the full details expected in the Autumn Statement on 3rd December.
Where will we see changes?
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 crystallised and uncrystallised funds, which means those in drawdown will see their potential tax charge on death cut from 55% to zero. 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 inheritance tax.
Death at 75 and over: 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 rules and will be taxed at the beneficiary’s marginal rate as they draw income from it. Alternatively, they will be able to take it as a lump sum less a 45% tax charge (down from 55%).
The changes can be summarised as follows:
Death before 75
|Today||New Rules from April 2015|
|Lump sum||Uncrystallised funds – tax free Crystallised funds – 55% tax||All tax free|
|Income||Taxed as incomeOption only available to dependants||Tax free if taken via new flexible incomeOption available to any beneficiary|
Death from age 75
|Today||New rules from April 2015|
|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|
Lump sum death benefits paid before age 75 from uncrystallised funds will still have to be tested against the Lifetime Allowance. Where a beneficiary inherits a pension it will not count towards their own Lifetime Allowance.
Wealth Planning: With all the pension changes announced this year, it means that a pension will become a family savings plan, enabling one generation to support the next.
Drawing an income: The new rules will mean that beneficiaries other than dependants may now benefit from the remaining fund, without suffering a 55% penalty. Death before age 75 offers the option of a tax free lump sum. It also allows the fund to remain within the pension which the beneficiaries would have flexible access to. And nominating a loved one to take over the flexible pension pot will also be a popular choice when death occurs after 75.
Retirement planning with formal pension contracts is one of Fiducia’s specialist subjects, and we understand the complexities compounded by the constant stream of rule changes. Do contact your Fiducia wealth manager to assist you in making the right decision.