This is the final piece of his Pension Reform jigsaw: and it is potentially the most significant change of all.
Currently if you die in drawdown a dependant continues to enjoy the right to income but other beneficiaries are subject to tax on the fund at 55%.
The reported changes are as follows:
- When the deceased person is 75 or over, beneficiaries will only have to pay their marginal income tax rate, and only when they take money out of the pension. There will be no restrictions on how much of the fund can be withdrawn at any one time. However if the pension is received as a lump sum it will be subject to a tax rate of 45%. We are unclear what might constitute a lump sum payment.
- When the deceased person is under age 75 – The defined contribution pension can be passed to anyone as a lump sum tax free. It does not matter if the pension is in drawdown or not (a material change). The person receiving the pension will pay no tax on the money they withdraw whether it is taken as a lump sum or accessed through drawdown.
It must be stressed that the only information we have is a press release from HM Treasury which leaves many questions left unanswered. In some respects the news is “too good to be true” and we await the detail of the legislation.
The announcement could impact the estates of those who have recently died if benefits of the pension fund are not distributed until after 6 April (there is a two year window to allocate death benefits), so executors should be aware of the proposed reforms.
The news is also another nail in the coffin of annuities and if you are on the cusp of buying an annuity it could be advantageous to reassess your decision.
Our view is that we just do not have enough information to provide any guidance at the moment.
We will be assessing further announcements as they arrive.
This article was previously published on Tilney prior to the launch of Evelyn Partners.