Over the next week or so, we will detail the pension changes due to come in from April 2015.
Change 4: 55% pension ‘death tax’ to be abolished
What is changing:
Currently, it is normally only possible to pass a pension on as a tax free lump sum if you die before age 75 and you have not taken any tax free cash or income. Otherwise, any lump sum paid from the fund is subject to a 55% tax charge.
From April 2015 this tax charge will be abolished. The tax treatment of any pension you pass on will depend on your age when you die.
If you die before age 75, your beneficiaries can take the whole pension fund as a tax free lump sum or draw an income from it, also tax free, either by using income drawdown or by choosing to buy an annuity.
If you die after age 75, your beneficiaries have three options:
a. Take the whole fund as cash in one go: the pension fund will be subject to 45% tax. However, it has been proposed this should be changed to the beneficiary’s or beneficiaries’ marginal rate of income tax from 2016/17.
b. Take a regular income through an annuity or income drawdown: the income will be subject to income tax at your beneficiary’s or beneficiaries’ marginal rate.
c. Take periodical lump sums through income drawdown: the lump sum payments will be treated as income, so subject to income tax at your beneficiary’s or beneficiaries’ marginal rate.
Who will be affected:
Anybody who has a defined contribution pension e.g. individual or group personal or stakeholder pension, Self Invested Personal Pensions, Additional Voluntary Contribution schemes, etc. will be affected. If you die before April 2015, your beneficiaries can still take advantage of the new rules if they wait until April to take benefits.