By Duncan Mitchell-Innes
At the recent Conservative Party Conference in Birmingham, George Osborne announced the abolition of the 55 per cent tax levied on unused parts of a “drawdown” pension pot at death. The new tax rules will apply to all payments made after April 2015.
This significant change means that pensions should be considered carefully as part of inheritance planning. The current maximum that can be paid into a pension is £1.25m and previous rules allowed even larger pensions to be accrued. This wealth can, under the changes, be passed tax free to younger generations.
When pension funds are inherited, they will be able to pass tax free to beneficiaries so long as the member was under the age of 75 at death, whether taken as a lump sum or retained in a pension.
Where the member was over 75, the funds will stay tax free so long as they are kept within a pension. When funds are withdrawn, those withdrawn funds will be taxed for income tax at the marginal rate of the beneficiary. If the funds are taken as a lump sum, rather that retained in a drawdown pension, the current proposals are that a 45% tax charge will apply but that this will be changed to the beneficiary’s marginal rate from 2016-17.
In both cases there is the possibility that such payments would also be subject to inheritance tax as part of the deceased person’s estate. As such, the Treasury has stated that it "would encourage individuals to contact their pension scheme to nominate a beneficiary and ensure that their nomination is kept up to date”.
The tax changes do not apply to final salary pension schemes or annuities other than value-protected ones.
The new rules are anticipated to increase the likelihood of monies being retained in pensions. This would firstly act as an encouragement to save. Secondly, it would counter the concerns expressed following the Chancellor’s initial pension reforms, announced in this year’s budget, that people might be tempted to spend through their pensions savings on retirement.
The Treasury, with HMRC, will conduct consultations before any legislation in this regard is finalised. Nevertheless, in the light of these significant proposed changes, it is advisable to review your will and your estate planning strategy.
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