George Osborne will announce significant changes to the pension “death tax” regime today, affecting those who have use the income drawdown method of taking their pensions. The changes are due to come into force in April 2015 along with the other major changes announced already.
Under current rules drawdown pensions are subject to 55% tax on death when taken by the nominated beneficiary as a lump sum. This can be avoided between spouses by the survivor continuing in drawdown or buying an annuity with the proceeds. If the funds are left to anybody other than the spouse the 55% tax charge is unavoidable.
For anybody over the age of 75 all pension funds left as a lump sum, whether utilised or not, are subject to the same 55% tax charge.
Under the newly announced plans, it looks like these taxes will be completely abolished for those who die before age 75, meaning that their entire pension fund can be left as a lump sum, free of tax, to anybody. For those who die over the age of 75 the lump sum will be taxed as the recipient’s income, at a maximum rate of 45%, although the majority is likely to be taxed at the basic rate of 20% or higher rate of 40%. This represents a significant softening in the rules.
The treasury has said these savings will come at the cost of £150M a year to the treasury, but as always the devil is in the detail, and we will provide more detailed guidance to our clients once the formal proposals are published.
