Pension “death tax” to be abolished.
On 29 September 2014 the Chancellor, George Osborne, announced that from 6 April 2015 a defined contribution pension can be passed to any nominated beneficiaries. The beneficiaries are likely to hold these funds in a pension scheme of their own. The tax treatment for these funds will depend on the age of the deceased.
If the deceased was less than 75 years old, withdrawals from the scheme by the beneficiaries will be free of tax.
If the deceased was over 75 years old, withdrawals from the scheme by the beneficiaries will be subject to income tax at their highest marginal rate.
Although the details have not yet been disclosed, it would seem that the above rules would also apply if the individual died between 29 September 2014 and 5 April 2015 but the beneficiaries received no benefits until after 5 April 2015.
Until 6 April 2015, if the pension scheme holder dies before age 75 and no tax -free cash or income has been taken from the pension scheme then the pension passes as a tax free lump sum to the beneficiaries. If over 75 or if under 75 and tax-free cash or income has been withdrawn from the scheme then the fund is subject to a 55% tax charge.
More flexible ways to make withdraws from pension schemes
Holders of defined contribution pension schemes can withdraw up to 25% tax free.
From 6 April 2015 holders of defined contribution pension schemes will be able to withdraw funds from their pension schemes using two options as follows:
Option 1
Take the tax free cash all in one withdrawal. Then future withdrawals will be subject to income tax at the individual’s marginal rate.
Option 2
Make a series of withdrawals over time, each of these withdrawals will consist of 25% tax free and 75% will be taxed at the individual’s marginal rate.
Example
At 1 July 2015 Mr A is 58 years old and he decides to start making withdrawals from his pension scheme. The pension scheme is valued at £360,000. Mr A’s two options for making withdrawals are as follows:
Either
1. Take up to £90,000 tax free in one withdrawal, then all future withdrawals would be subject to income tax at Mr A’s marginal rate;
or
2. Choose to have 25% of each withdrawal tax free with the balance of 75% subject to income tax at Mr A’s marginal rate.
Before 6 April 2014 only one single tax free lump sum can be taken from a pension scheme up to 25% of the value in the scheme. Any withdrawals in excess of the 25% tax free amounts will be subject to income tax at the individual’s marginal rate.
Until 6 April 2015 holders of defined contribution pension schemes can draw an income from their pension fund by a process known as “income drawdown”. There are currently limits on how much can with withdrawn by this process. From 6 April 2015 these limits will no longer apply and pension scheme holders will be able to withdraw as much or as little as they like.
Further details can be found in The Taxation of Pensions Bill at the following address: