Major changes to your pension were announced in the Budget earlier in the year, but today’s Autumn Statement still contained some important additional tweaks.
Tax on pension death benefits
The new rules, which had partly been announced already, will significantly reduce the amount of tax payable on death, although contrary to some news articles, it won’t be completely abolished.
From April 2015 the new rules can be summarised as follows:
- Death before the age of 75 Now completely tax-free, irrespective of whether the individual has retired or taken any benefits from the pension
- Death after the age of 75 Where beneficiaries elect to take a lump sum, a 45% tax charge will be made on death between 6th April 2015 and 5th April 2016; thereafter tax at the beneficiaries marginal rate will be paid. If a pension income is taken rather than a lump sum, the beneficiaries will simply pay tax at their marginal rate.
The new rules will therefore allow anyone dying before the age of 75 to pass on 100% of their pension fund to whoever they wish. Whilst not abolished, the rate of tax payable on death after the age of 75 will also fall significantly from the current level of 55%.
However, George Osborne went further today, announcing new rules for Annuities.
From the 6th April 2015 anyone receiving a spouse’s pension following the death of their husband or wife before the age of 75, will receive the income tax-free. The same will apply to payments received from guarantee periods on Annuities.
The widow or widower will receive the income tax-free for life; however death must occur before the age of 75 and after 6th April 2015. If your spouse dies between now and then, it may be possible for the Annuity provider to delay the first payment of the widow or widower’s pension until after the 6th April 2015, which will mean the income is tax-free for life.
To dispel a myth though, the changes don’t mean the payments from a pension on death will be entirely tax-free; this is only the case if death occurs before the age of 75.
Annuity death benefit flexibility
Under current rules the income from a joint life Annuity can only be paid to a spouse, civil partner or financial dependent. This will be changed so that income can be paid to any beneficiary.
Commenting on the changes Andrew Tully, Pensions Technical Director at MGM Advantage said:
“This change brings Annuity death benefits into line with drawdown, where on death before age 75 benefits can be paid tax-free. For deaths after age 75, a dependant’s pension or remaining guaranteed instalments will be taxed as income in the hands of the recipient (again in line with drawdown).
Tully continues: “Allowing Annuity benefits to be paid to any dependant gives people greater flexibility to pass on their pension wealth, for example to grown-up children.”
“But it is worth keeping in mind this change will only benefit the estate of those who die before age 75. If you are a healthy 65 year old, then you have a 90% chance of surviving your 75th birthday. If you have moderate health conditions, for example diabetes or high blood pressure, then you have an 80% chance of surviving your 75th birthday.”
“This is a fair move for customers who value the security and guarantees that Annuities deliver. It shows the Government recognises that Annuities can still play an important part of a customer’s retirement strategy after April. While people may well want to use the new flexibility offered, many will also want a level of certainty and security provided by an Annuity to cover at least their basic income needs.” (Source: MGM Advantage)
Plans to give over 75s tax-relief abandoned
Anyone over the age of 75 cannot get tax-relief on pension contributions.
With the number of older workers increasing, George Osborne announced in the Budget that the Government would consult on whether to extend tax-relief to the over 75s.
However, following an ‘informal consultation’ the Government has dropped these plans and the existing rules will remain unchanged.
We’re here to help
If you have questions about today’s announcements or would like to know more about how they affect you our team of advisers are here to help you.
Call us on 0115 933 8433 or email info@investmentsense.co.uk
