Chancellor Announces abolition of 55% tax rate on pension funds


Pensioners with defined contribution pensions can now leave more of their hard earned savings to their beneficiaries, after Chancellor George Osborne today announced the abolition of the 55% tax rate on pension funds.

The measure, which comes into effect in April 2015, will affect approximately 320,000 people who retire each year with defined contribution pension savings.

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Defined contribution pension savings are those plans for which contributions are specified (mandatory or voluntary depending on the scheme), but the amount received by the employee on retirement is not fixed.

From April 2015, individuals can pass their defined contribution pension to a dependant (which includes their spouse/civil partner or child under the age of 23), who can then access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.

Under the current system, a 55% tax charge on inherited pensions applies when an individual wants to pay their defined contribution pension out to somebody else as a lump sum after they die, and where the pension money is:

  • already in a drawdown account (regardless of the individual’s age), or
  • "uncrystallised” (i.e. hasn’t been touched) and the individual dies at or over the age of 75

Under the new system:

If the individual dies before they reach the age of 75:

  • There are no restrictions on how much of the pension fund the beneficiary can withdraw at any one time.
  • Individuals will be able to give their remaining defined contribution pension to anybody of any age  as a lump sum completely tax free, if it is in a drawdown account or uncrystallised.

If the individual dies after they reach the age of 75:

  • The nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.
  • There will be an option to receive the pension as a lump sum payment, but this would be subject to a tax charge of 45%.

At the 2014 Budget, the Government announced the abolition of the requirement to buy an annuity, meaning that people will have greater flexibility when accessing their pensions i.e.  they can choose to take all their pension savings as one lump sum, draw on their savings over time, or buy an annuity.

The announced changes have not yet been formalised by legislation so we await full details to clarify our understanding. In the meantime if you would like to discuss the new measures or indeed if you have any existing pensions or IHT issues, please contact:

Tim Adcock  

Tim Adcock
Tax Partner

Call: 0151 255 2300
Email Tim

 

     
Mike Wall 2014  

Mike Wall
Pensions & Investments Consultant

Call: 0151 255 2300
Email Mike

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