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Passing on the family silver – The Chancellor announces radical pension changes

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30 September 2014

George Osborne has announced that the Government is going to do away with the 55% death tax on pensionable funds from April 2015.

Currently HMRC currently takes 55% of pension pots unless they are left to a husband or wife or a child under 23 so removing this penalty could benefit hundreds of thousands of people each year. In essence, from April 2015 pension funds could become a new tax-efficient savings vehicle.

Who will benefit?

Anyone who has a defined contribution pension. 

This covers most pension schemes and those that aren’t affected are final salary company schemes and the state pension.

How will the changes affect those who die before the age of 75?

Firstly if a pension fund has not been used to provide an income, there is no tax payable.

However, anyone who inherits a pension fund which is already being used to provide an income, has to pay 55% in tax. The only exceptions are spouses or children under 23. Instead, they are required to pay income tax on any income they draw from the fund. 

From April 2015, anyone who inherits a pension fund will have no tax to pay, whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25m (the current lifetime allowance) on the the value of payouts from your pension schemes – whether lump sums or retirement income – that can be paid out without triggering an extra tax charge.

For example, at the moment those who die before 75 can only pass on their retirement fund tax free if they have not touched it.

The changes mean that if they were taking an income from it, and someone’s pot is worth £200,000, this would now be passed to a beneficiary completely tax free. 

How will the changes affect those who die after the age of 75?

Currently anyone who inherits an unused pension pot from someone older than 75 has to pay tax at 55%. Spouses however can inherit the pension (but no other beneficiaries), and pay income tax on the income they receive.

But from April 2015, all beneficiaries will only have to pay income tax. Depending on the rate of tax they pay.  -

For example, a 50 year old whose father died at 77 leaving a £200,000 pension pot would currently end up with just £90,000.

Under the reforms he gets the full £200,000 and can withdraw it as he likes, paying income tax on the money he withdraws.

What will happen to annuities?

For those of you that don’t know, annuities are where a pension pot is used to buy an income for life.
This will continue to be the only way of guaranteeing a particular level of income, but once an annuity is purchased, it cannot generally be passed on to someone else, other than a spouse, without considerable expense.

As a result, the new tax rules are likely to make annuities look even less attractive, in comparison to keeping savings in a pension fund.

Can I use a pension to avoid inheritance tax?

Up to the age of 75, passing on a pension will carry no tax liability. So it would certainly appear as though there are planning opportunities here.

Summary

As always, there’s no simple answer but it would appear pensions are becoming much more flexible, both in terms of access, funding and taxation on death.

If you have any questions, please speak to your usual Hazlewoods contact or Gary Cook on
01242 680000 or gary.cook@hazlewoods.co.uk

Gary Cook - Associate Partner
Gary Cook
Associate Partner Contact details