Chancellor George Osborne has announced the abolition of the 55% pensions death tax charge. The changes will come into force in April 2015 alongside the pension reforms outlined in the Budget.
The new rules mean that if a person who dies is 75 or over, beneficiaries will only pay their marginal tax rate on drawdowns from the pension. When an individual under the age of 75 dies they will be able to give their pension pot to any beneficiary tax free, including if the pension is already in drawdown. There will be no tax when the pension is passed on, and the beneficiary will not have to pay income tax on the money they withdraw from the pension. Beneficiaries will be able to access pension funds at any age although the lifetime allowance, currently £1.25 million, will still apply.
Although the new rules come into force in April 2015, beneficiaries of anyone who dies before then can still benefit as long as payment is delayed until after that point.
Under the existing rules, anyone who dies over age 75 can only pass on their pension fund tax free to a spouse or dependent under 23 years of age. If a person dies before age 75, they can only pass on pensions tax free if untouched. If they have taken out tax free cash and the fund is in drawdown, then the 55% tax is still charged.
It had been anticipated the charge would be reduced to 40%, but in scrapping it completely George Osborne has gone further than anticipated. The expected cost to the Treasury will be around £150 million per year and it will affect around 320,000 people.
We are working with clients on an individual basis to see how they can personally benefit from the incoming pensions rules.
The Daily Telegraph has the story here.