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Changes to Taxation on Pension Death Benefits

By October 9, 2014February 12th, 2019No Comments

George Osborne, The Chancellor of the Exchequer has just announced that from April 2015 there will be changes to how pensions are taxed on Death. His announcement was a continuation on the theme of freedom and flexibility for pension savers.

Under current rules a 55% tax charge applies when an individual intends for their Defined Contribution pension to be paid to somebody else as a lump sum after they die, specifically where the pension is already in drawdown (i.e. Tax Free Cash or income has or is being taken) or where an individual dies at, or over the age of 75, with untouched pension funds (uncrystallised funds).

If the individual who inherits the pension scheme chooses not to take the benefits as a lump sum and draws down income, they would pay income tax at their marginal rate.

So what has changed?

Under the proposed system from April 2015, individuals who die below the age of 75 will be able to give their remaining Defined Contribution pension funds to a named beneficiary completely tax free, with the exception of funds accumulated in excess of the Lifetime Allowance currently at £1.25m.

The new rules will apply regardless of whether the funds have been accessed or not, provided it is paid out as a lump sum.

For those that die past the age of 75, the death benefit lump sum is still subject to a tax charge of 45%, however if the new beneficiary of the funds draws the benefits from the new flexi accounts available from April 2015, then only the marginal rate of tax would be applied to any withdrawals.

These new rules also apply to anyone who has or does purchase an annuity, where the value protection has been included.

Taking advice is more important now than it has ever been in the past for both those accumulating pensions savings and those looking to draw benefits. If you have any questions, please do not hesitate to contact us.