Pension death tax scrapped in latest Osborne bombshell

Pension pots will no longer be subject to a death tax if they are passed on to the next of kin when the pension saver dies, chancellor George Osborne has announced.

In his latest pension bombshell, Osborne today announced that from April 2015 people will be able to leave their remaining defined contribution pension fund to any nominated beneficiary when they die, without having to pay the 55 per cent tax.

Currently, if you die before age 75 you can only pass on your pension pot without tax if it is untouched. If you are under 75 but have ‘crystallised’ or started to draw your pension, it is taxed at 55 per cent when it is passed on.

Alan Higham, retirement director at Fidelity Worldwide Investments, welcomes the proposals, saying: 'This was a poorly understood area which tripped up a number of people who inadvertently caused their loved ones to pay huge sums of tax on their death soon after retirement.

Tax free

'People will no longer have to choose between taking some tax free cash now or putting it off until later for fear of triggering penal death duties.'

From April 2015, people will be able to pass on their pension pot completely tax free, whether they are already in drawdown or their pension fund is still untouched. The money will remain free of tax as long as it remains in the pension.

If they die before 75, the person receiving the pot will also pay no tax on what they take from the pension, whether it is taken as a single lump sum or accessed through drawdown.

To find out all you need to know about the new pension rules, click here.

If they die after age 75, the person receiving their pension pot will be able to draw as much as they like at any one time, but will pay their marginal rate of tax on whatever they take out. Alternatively they can choose to receive the pension as a lump sum payment, but it will be taxed at 45 per cent.

The lifetime allowance - £1.25 million at time of writing - still applies.

Pensions expert Ros Altman adds that this change brings in 'another reason not to buy an annuity'.

Annuity providers suffered a hit in the spring when Osborne announced pension savers would be able to draw down as much or as little of their pot as they like, making drawdown a viable option for more people who might otherwise have bought an annuity.

Figures suggest the number of annuity sales have fallen by almost 40 per cent between the first and second quarters of 2014.

Altmann says: 'These new measures are also another nail in the coffin for annuities. Any money that has been used to buy an annuity cannot normally be passed on to the next generation unless there is a guarantee attached, whereas funds in drawdown can pass on free of tax in future.'

Shares in annuity providers Partnership and Just Retirement had both fallen about 6 per cent in the wake of the news.

If you die before age 75
 Old systemNew system
You haven't touched your pension fund and pass it on as lump sum to anyone (uncrystallised)Tax freeTax free
You've taken money out of your pension fund (tax free cash taken or in drawdown) and pass it on as income or lump sum to anyone other than partner or child under 23 (crystallised)55% taxTax free
You've taken some money out of your pension fund (tax free cash taken or in drawdown) and pass it on as income to partner or dependent child under 23 (crystallised)Marginal income taxTax free

 

If you die after age 75
 Old systemNew system
You haven't touched your pension fund and pass it on as lump sum to anyone (uncrystallised)55% tax
Tax free (until income drawdown, then marginal tax)
You've taken some money out of your pension fund (tax free cash taken or in drawdown) and pass it on as lump sum to anyone other than partner or child under 23 (crystallised)55% taxTax free (until income drawdown, then marginal tax)
You've taken some money out of your pension fund (tax free cash taken or in drawdown) and pass it on as income to partner or dependent child under 23 (crystallised)Marginal income taxMarginal income tax

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