In the dark
Nearly two-thirds of people approaching retirement are not aware of pensions ‘death tax’ reforms.
By now the majority of people over the age of 55 will be aware that if they have a defined contribution pension – one where the contributions are invested to provide a fund at retirement - they can now take any amount from it that they like.
These new freedoms to take income, introduced in April this year, have been widely reported, with the most notable headlines emerging following the then pensions minister Steve Webb’s comment that if people blow their pension pot on a Lamborghini, “that is their choice”.
But it appears that the changes to the way pensions are taxed on death, brought in at the same time as the income reforms, are still a mystery to most people approaching retirement.
A recent survey1 found that nearly two-thirds of people between 55 and 64 didn’t know about the changes to the pensions ‘death tax’.
Pensions, whether untouched or already being used to draw an income, can now be inherited tax-free if the pension holder dies before the age of 75, regardless of whether the beneficiary chooses to receive income or a lump sum. Even if death is after 75, the situation is improved somewhat; lump sums from the pension are inherited at a tax rate of 45%, rather than the old 55% rate.
The table below illustrates the changes that have been introduced.
“The new rules are game-changing and paint a vastly improved picture when it comes to the possibility of leaving your drawdown pension tax-free,” says Ian Price, divisional director at St. James’s Place. “What’s more, the rules allow for broader estate planning opportunities because a pension can now be left to anyone on death, not just a dependant,” he adds.
Before April 2015, a pension could only provide support to financial dependants. “Now they can be left to a child, grandchild, niece, nephew, or even someone unrelated,” continues Price.
These improved death benefit options are also extended to ‘joint life’ and ‘value protected’ annuities.
“Understandably, death is not a topic at the forefront of most people’s minds as they approach and look forward to a long-awaited retirement,” says Price. “However, the new rules present a simple opportunity to reduce your Inheritance Tax bill and ensure your pension is provided to someone other than your spouse, if you so wish.”
“It’s potentially something that could make all the difference to your family’s financial future. Anyone unfamiliar with the rules should speak to their adviser and go from there.” he concludes.
1 YouGov survey for Old Mutual, April 2015
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.