The Chancellor is announcing today that he is waving goodbye to the pension death tax from next April.
From 6th April 2015, individuals “will have the freedom to pass on their unused defined contribution pension to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pensions passed on at death”.
This is important for around 320,000 people every year who die with unused pension funds which, since 2011, have been subject to a pension death tax of 55% if taken as a lump sum.
The new rules mean that, if the individual dies before their 75th birthday, they will be able to pass on their remaining pension fund to anyone as a lump sum completely free of tax.
This will be the case whether the pension is in a drawdown account or uncrystallised.
The individual receiving the pension fund from a person who dies before age 75 will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.
Should someone die after their 75th birthday, with a drawdown arrangement or with uncrystallised pension funds, their nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.
If they opt to receive the entire pension fund as a lump sum, it will be subject to a 45% tax charge.
Under current rules, a pension death tax charge of 55% applies when a beneficiary receives the lump sum from an income drawdown arrangement or, when the person who dies has already reached their 75th birthday, from an uncrystallised pension fund or income drawdown arrangement.
This removal of the pension death tax, in some cases, is expected to cost HM Treasury around £150m a year to implement. It will be fully costed in the Autumn Statement.
Although pension funds are primarily designed to provide an income in retirement, these rule changes mean they will increasingly be viewed as an estate planning tool for families.
Do speak to us if you have any questions about the changes to pension rules being introduced in April 2015.
