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55% “death tax” abolished

by | Oct 6, 2014 | Pension & Retirement News, Tax News

Ahead of the major pension changes already announced for April 2015, the Chancellor, George Osborne, this week announced another shift in pension policy that could have a big impact on many savers and their financial planning requirements.

No more 55% tax

Speaking at the Conservative Party’s Annual Conference, Mr Osborne announced the abolition of a so-called ‘death tax’, which can see any pension remaining on death taxed at a rate of 55%, before it is passed on to a beneficiary.

The change, as with the other changes to pensions already announced, will be introduced from April next year.

The 55% tax is already waived when pension savings are passed to a spouse or a financially dependent child under the age of 23.

320,000 should benefit

The government estimates that the new change announced by Mr Osborne will impact an extra 320,000 people outside of the above groups.

The details of the changes revealed different permutations for beneficiaries depending on how old the pension holder is at the time of their death.

Over 75 vs under 75

If the deceased is 75 or over, beneficiaries will pay only their marginal rate of income tax, with no limit on how much of the pension fund can be accessed at any one time.

If the deceased is under 75, access to the pension fund will be tax free, including situations where the pension has already entered drawdown.

New options for final salary schemes?

The proposal only impacts defined contribution pensions, although there may be new options to consider for individuals in final salary schemes.

Our view

  • This is a logical continuation of the changes announced in the March Budget.
  • In March the need for savers to rely on an annuity was abolished.
  • An annuity can lead to a portion of pension savings being wasted, when it comes time to pass on your estate.
  • The new taxation system announced this week aligns the taxing of pension savings on death with the new approach to pensions.

That’s good news all round.

 

Sources: George Osborne Conservative Party Conference speech (29/09/14), http://www.theguardian.com/money/2014/sep/29/who-benefits-abolition-55-percent-tax-pensions

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