George Osborne is developing a habit of pulling pension rabbits out of his hat. In the 2014 Budget he proposed astonishing new flexibilities for pension plans at retirement. Then at his party conference he announced surprising plans to eliminate taxes on many inherited pension funds. This has made pension savings even more valuable for estate planning and inheritance tax planning.
Death before age 75:
Currently, when a pension scheme member dies before age 75 and the remaining fund is paid as a lump sum, there is generally no tax due if you have not started drawing on the pension. To achieve this, the scheme administrator must select the beneficiaries or the money must be placed in a trust established for the purpose. There is generally a 55% charge if the member has received the tax-free lump sum and the pension is in income drawdown.
Alternatively, a pension income may be provided for a dependent, taxable at their marginal rate. From 6 April 2015 the Government plans to remove all tax on death before age 75 if the scheme pays the death benefit to someone nominated by the member. This applies to both lump sums and withdrawals from income drawdown. However, if the payments come from an annuity they will be taxable as the recipient’s income.
The new rules apply to pension scheme members who die before 6 April 2015, as long as no payment is made before that date.
When you first buy an annuity, you can choose for the income to be paid to your spouse or partner after you die (a joint-life annuity). You can also choose a guarantee period or value protection – for example, if you buy a 10 year guarantee and die after 2 years, the annuity will be paid for another 8 years to your spouse, partner or beneficiaries.
Currently, your spouse, partner or beneficiaries pay income tax at their marginal rate. In the Autumn Statement the Chancellor announced it will be tax free if you
die before age 75.
A joint-life or dependant’s annuity will now be able to be paid to anyone after you die. On their subsequent death any value protection or remaining guarantee
period can be paid to anyone.
Who will be affected:
Anybody with a joint-life, value protected or guaranteed annuity who dies before turning 75. The first income payment to your partner,
spouse or beneficiaries must be made after 5 April 2015, otherwise it will be taxable
Death after age 75:
Currently, on death after age 75 lump sums paid from pre-retirement pension or income drawdown are taxed at 55%. From 6 April 2015 that will reduce to 45%, and it may change to the recipient’s marginal rate a year later. Income payments will be at the recipient’s marginal rate, as they are at present.
The new rules will increase your control over your pension fund if you die, and they may therefore affect how you fund your income in early retirement. You must also tell your pension scheme who you nominate to inherit your pension fund. We can advise you, taking into account further clarifications as they emerge.
Past performance is not a reliable indicator of future performance. The value of your investment can go down as well as up and you may not get back the full amount you
invested. Tax and pension laws can change.