UK Government To Abolish 55% Pensions Death Tax

24.10.14

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Under current pension rules, if you have a defined contribution pension, when the balance is paid to your beneficiaries on death, a 55% tax charge is levied if you have started taking benefits or are aged 75 or over.

Under current pension rules, if you have a defined contribution pension, when the balance is paid to your beneficiaries on death, a 55% tax charge is levied if you have started taking benefits or are aged 75 or over.

This has been an unpopular tax, and the Government’s consultation document in July, Freedom and Choice in Pensions, included the news that it would cut the 55% death benefit charge, with a new rate to be announced in the Autumn Statement (usually held in early December).

However, in a surprise move, on 29th September Chancellor George Osborne announced that the government would abolish the tax.

The HM Treasury press release explained: “Around 320,000 people retire each year with defined contribution pension savings; these people will no longer have to worry about their pension savings being taxed at 55% on death”.
 
The measure will come into force in April 2015 alongside the other pension freedom reforms.

Current rules

A 55% tax charge on inherited pensions applies when a defined contribution pension is paid out as a lump sum on death, if:

  1. The pension is already in drawdown (regardless of the individual’s age), or
  2. The individual is age 75 or over and he has not drawn from his fund.

The pension can also be passed to a spouse or child under the age of 23, who can then draw it down at their marginal rate of income tax.

New rules

Where the individual dies aged below 75, their beneficiaries will receive the balance tax free. This applies whether the fund is in drawdown or untouched, provided it is paid out as a lump sum or taken through a flexi access drawdown account.

Where the individual is aged 75 or more, their beneficiaries will be able to draw the pension at their marginal rate of tax. Alternatively, they could opt to receive it as a lump sum, subject to a 45% tax charge. (The government has said that it intends to also make a lump sum subject to the recipient’s marginal rate from 2016/17).

Note that the lifetime allowance of £1.25 million still applies.

This follows on from an announcement earlier this year that the government will, following amended legislation, remove all remaining tax restrictions on how retirees have access to their pension pots. From 6th April 2015 they will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. The tax rate on cash, over and above their tax free cash sum, taken out of defined contribution pension funds withdrawn on retirement (from age 55) will be reduced from 55% down to the member’s marginal rate, with members being able to drawdown on the entire fund as required.

Seek specialist advice on exactly how all the new rules and options will apply to your personal situation, to determine the best way forward for your retirement years and your family in future. It is essential to consider the tax implications in your country of residence, and how the local tax regime interacts with the UK one.

15 October 2014

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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