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Autumn leaves

Demise of ‘death tax’

06 October 2014

The Chancellor’s latest pension change may be his most generous move yet.

In his speech at the Conservative Party conference last week, George Osborne revealed details of a change to the taxation of pensions death benefits; a move that looks set to save hundreds of thousands of families tax totalling £150 million each year.

The latest measure will abolish a 55% ‘death tax’ on inherited pension benefits, enabling many savers to pass on their pensions to loved ones tax-free. The announcement was the second part of proposals in this year’s Budget designed to deliver “freedom for people’s pensions”, which are due to come into effect from April next year.

The move comes alongside plans to give members of defined contribution pension schemes unrestricted access to their retirement savings from age 55. Suddenly, pensions look a lot less inflexible and a great deal more appealing.

Under existing rules, it is only possible to pass on your pension fund tax-free if it is ‘uncrystallised’ – in other words, untouched and still held in the fund – and only if death occurs before age 75. Lump sum death benefits from ‘crystallised’ defined contribution pension schemes, i.e. those from which benefits have already been taken, are subject to a 55% tax charge.

In broad terms, under the new regime, when someone dies before age 75, the beneficiaries of their unspent pension fund won’t be taxed at all. This applies whether the beneficiaries take the pension fund as a lump sum or as income.

When someone dies over the age of 75 – the more likely scenario based on longevity – beneficiaries will be able to take the residual pension fund as a lump sum subject to a tax rate of 45%, instead of the current 55% tax rate. Alternatively, they can continue to draw the income and instead pay their marginal rate of tax, as they would with their own pension.

Importantly, the new rules extend the tax saving opportunity beyond spouses and other financial dependants to any beneficiary, including grandchildren. The changes will benefit those who haven’t yet taken their pension, or who have already entered income drawdown. They do not apply to annuity payments or final salary schemes.

The beneficiaries of people who die before 5 April 2015 (including the beneficiaries of those who died before the announcement) will be able to ask the administrator of the pension scheme to delay the payments until after 5 April next year in order to benefit from these changes.

The prospect of pensioners passing on their savings to the next generation without penal tax charges could encourage them to be more prudent with their retirement pot, countering concerns that the new freedom to access funds would lead to extravagant spending.

The details are yet to be firmed up, but the measure is due to come into effect from next April alongside the other pension reforms outlined in the Budget. What’s more clear is that the proposals open up a number of financial planning needs and opportunities, from reviewing Wills and pension beneficiaries, to reconsidering pension contributions and how the measures might help with inheritance tax planning.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances. Advice relating to a Will involves the referral to a service that is separate and distinct from those offered by St. James’s Place.

Wills are not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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