‘People who have worked and saved all their lives will be able to pass on their hard- earned pensions to their families tax-free.’

In his speech to the Tory faithful on 29th September George Osborne delivered more good news for those who have built up pension funds in ‘defined contribution’ plans (such as personal pensions or self-invested personal pensions).

Currently people who die under the age of 75 and have not drawn benefits from their pension will see their funds distributed to their beneficiaries free of all tax if taken as a lump sum with sufficient lifetime allowance remaining. For those who die after age 75 there is a 55% tax charge on the funds if taken as a lump sum prior to distribution to the nominated beneficiaries. In both cases if death benefits are taken as income (currently available to dependants only) the income is taxed on the recipient at their marginal income tax rate(s).

For those who die under the age of 75 and were drawing down benefits, any lump sum leaving the pension wrapper on death will be subject to 55% tax. However, a spouse (or other dependant) has always been able to elect to continue drawing down the fund as income rather than taking the lump sum and suffering the punitive level of tax – such income is taxed on the recipient at their marginal tax rate(s).

The changes George Osborne announced suggest that:

Those under the age of 75 who have drawn benefits from their pension will see funds distributed to their beneficiaries free of tax on death, whether taken as a lump sum or via the flexible income option. The income option will, in future, not only be restricted to dependants.

Those who die after age 75 will see any funds that are drawn from the pension fund as a lump sum by the beneficiaries subject to a tax rate of 45% (or possibly, after consultation, the beneficiary’s marginal rate(s) of income tax). If taken as income, the income will be taxed at the recipient’s marginal tax rate(s) – income payments will no longer be exclusive to dependants.

We see the following potential opportunities for our clients. This is based on the information we have so far as no detailed technical information or draft legislation has yet been published and the ideas below may alter once full details are available:

For those who are under the age of 75 who wish to gift their pension fund to their family can now re-examine the decision to defer drawing income. For example income drawn from the pension can be passed through to beneficiaries utilising the ‘out of income’ exemption to inheritance tax without any detrimental impact on the fund that is not distributed at the point of death.

For those who are over the age of 75 consider spending personal capital and leaving pensions to your beneficiaries. If the lump sum tax rate does change from 45% to the marginal rate for the beneficiary then consider leaving the pension funds to non or lower rate income tax payers (e.g. grandchildren), and non-pension assets to higher rate taxpayers. A pension is a trust and the trustees usually have discretion over who receives the death benefits. Any income received by a beneficiary will be taxed at the beneficiary’s marginal rate(s) of income tax.

As is to be expected when such an announcement comes out of the blue in the middle of a party conference, a number of points still need to be fully clarified and the pension industry awaits full details in the Autumn Statement on 3rd December.

Andy Gait APFS
Chartered Financial Planner & Certified Financial Planner
01633 653 191
andy.gait@gouldfp.com