This week the Chancellor made yet another surprising announcement affecting pensions. This time it concerns the scrapping of the tax charge applied to some lump sums paid following death.
For those who have a pension pot in access of £200K this announcement, along with the previous changes announced at the budget, are of significant importance.
How do the latest pension changes affect you?
- To clarify any confusion following Mr Osborne’s statement that the rules would benefit savers “from today”, there will be no changes to the taxation of pension payments made before April 2015
- The tax cut will apply to all payments made after April 2015, but savers retiring today can ensure they fall under the new rules by delaying their payments until April 2015
- Post-April 2015 when death occurs pre-75 funds are passed on completely tax free and no tax is payable on withdrawals from that pension, whether taken as a single lump sum or accessed through drawdown
- Post-75 no tax is payable when the pension is passed down, however the beneficiary will pay at their marginal rate of income tax on any withdrawals
- If a beneficiary withdraws a pension passed on death post-age 75 as a lump sum, they will be subject to a 45 per cent tax charge
- The government intends to also make lump-sum payments subject to tax at the marginal rate and will engage with pension industry in order to put this regime in place for 2016-17.
The following diagrams explain the current situation and the changes in April 2015:
Arguably, this should encourage savers to put more into their pension funds, safe in the knowledge that the funds will now be accessible whether they die early or live for many years in retirement.
Under the current regime it makes sense to spend pension assets in drawdown as ultimately they would be subject to a 55 per cent tax charge on death, as opposed to non-pension assets at 40 per cent. Now investors may be advised to spend non-pension assets and preserve pension benefits in a drawdown plan.
Bringing clarity to your pension options
The change to the way that you can now use your pension creates a variety of opportunities
Swindells Financial Planning would like to show how you can maximise these opportunities and invite you to our next seminar on 13th November at Uckfield.
