Clients have always complained that they were not allowed to pass their pension funds on to their family just as they do with their house and other assets.
Acumen’s advisers have always made sure that we make the best use of the pension rules but we have also felt that it was very unfair.
George Osborne gave all of us a big boost yesterday.
The current 55% pension tax charge on death is to be scrapped. Those people who draw sensibly on their pension fund will no longer be penalised when they pass away. In future, pensions will become a very attractive way to transfer wealth down through the generations.
Pensions – So what’s changing?
Your age at death will still determine how your pension death benefits are treated. 75 is still the significant birthday but there are some very welcome amendments.
Death before 75 –
The pension fund can be taken tax free, at any time, whether in instalments, or as a one-off lump sum and it won’t make any difference whether you have taken any tax free cash or income from the fund before so those people already in drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide loved ones with a sustainable stream of income allows them potential for tax free growth, while remaining outside their estate for IHT.
Death after 75 –
Defined Contribution Pension savers will be able to nominate who ‘inherits’ their remaining pension fund. The beneficiaries can then choose to draw an income which will be taxed at their marginal rate or else they can draw a lump sum less a 45% tax charge.
These new rules will apply to payments made on or after 6 April 2015 rather than the date of death. So where payment of death benefits can be delayed until after 5 April 2015, the beneficiaries will be able to take advantage of the new rules.
Summary of the new pension rules
We’ve prepared a quick summary to make the rules easier to understand.
Death before age 75
Death after 75
What does this mean for savers?
Knowing that family members can benefit from the remaining fund means that a pension will become a family savings plan, enabling one generation to support the next.
Drawing an income
The new rules will mean that you can choose your beneficiaries – and they won’t suffer the 55% penalty.
Death before age 75 offers the option of a tax free lump sum but it also allows the fund to remain within the pension wrapper which your beneficiaries then have flexible access to. We think that nominating a loved one to take over your flexible pension pot will prove very popular .
Crystallised and uncrystallised funds will both be treated the same on death.
Make your wishes known!
This is really important. Who do you want to get your savings when you pass away? We can arrange for a nomination or expression of wish to help to guide the scheme trustees in their decision making. After all, you wouldn’t knowingly entrust what happens to your home or other assets on death to a stranger. If there are no instructions in place, you’re relying on the pension scheme trustees to second guess your intentions.
All eyes on 3rd December
It’s worth stressing that more detail is awaited, particularly on how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3rd December. We’ll provide updates on the final pieces of the pensions reform jigsaw, as it all starts to slot into place. Watch this space.