The good news on pensions just keeps on coming
Chancellor abolishes draconian 55% pension death tax – no inheritance or income tax if funds passed on as pension
Now pension savers will be able to leave all their funds tax-free to next generation
Another nail in the coffin for annuities, but more money could be available for care
by Dr. Ros Altmann
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Pensions to pass to next generation tax-free: The Government has now announced the final piece of its pension revolution – and it is yet more good news for pension savers. The current 55% tax penalty payable when pension funds are passed on after death is being swept away. In future, pensions can pass on tax free.
Will help deter people from spending pension funds too soon: This will encourage more people to keep more money in their pension funds for longer. This should benefit them in later life, especially if they need to pay for care. It will deter people from spending their pension money straight away, since money withdrawn will be subject to income tax.
Another reason not to buy an annuity: These new measures are also another nail in the coffin for annuities. Any money that has been used to buy an annuity cannot normally be passed on to the next generation (unless there is a guarantee attached) whereas funds in drawdown can pass on free of tax in future.
55% pension death tax being abolished: Anyone who passes on their pension fund to their loved ones on death will no longer face the prospect of a 55% tax penalty. All their money can pass on to the next generation free of tax, as long as it is in a pension fund.
Currently, if you die after age 75, pensions are taxed at 55% – in future it is tax free if kept in a pension: Under the existing rules, anyone who dies over age 75 can only pass on their pension fund after a draconian 55% tax charge. In future, all inherited pension funds will be free of tax if they are kept as pension savings. If the heirs then take money out of the fund, they will just pay income tax at their marginal rate, which is far lower than the current 55% of course.
Currently, if you die before age 75, you can only pass on pensions tax free if untouched: If people pass away before age 75, they can only currently pass on their pension fund tax free if it has not been touched. If they have taken out tax free cash and the fund is in income drawdown, then the 55% tax is still charged. Under the new rules, these funds will all pass on tax free, whether or not the pension saver has already used some of their pension money.
Only the wealthiest can usually afford not to touch their pension before age 75, so this is good news for ordinary savers: This is good news for ordinary savers, who often will not be able to afford to leave their pension funds untouched until age 75. The existing rules disproportionately benefitted the wealthiest, but now every pension saver, regardless of their means, will know that their hard-earned savings can pass on to their loved ones without the current unfair tax penalty.
Only tax free if kept as a pension – otherwise will be subject to marginal tax: The pension funds will only stay tax-free if the money is kept in a pension fund. If those who inherit the funds want or need to spend the money, for example to help them onto the housing ladder, repay large debts or fund education, they will just have to pay tax at their marginal rate on any amounts taken out.
Will encourage more money to stay inside pensions: This will encourage more people to keep more money in their pension funds for longer. There has been much concern expressed about the recent pension reforms encouraging people to spend their pension funds too soon, leaving them in poverty later on. These tax changes will provide a significant incentive for people to keep their money in the pension fund, where it can earn tax free returns, until they really need it. This will help them if they live longer than expected, but could also provide a source of funding for care needs in later life, should this be required.
Summary of the changes:
|Die before age 75 Old system||Die after age 75 Old system||Die before age 75 New system||Die after age 75 New system|
|Pension fund passed on (as a pension) if no money yet withdrawn||Tax free||55% tax||Tax free||Tax free|
|Pension fund passed on (as a pension) if tax free cash taken or in drawdown||55% tax||55% tax||Tax free||Tax free|
|Tax payable if funds passed on are spent rather than kept in a pension||Marginal Income tax||55% tax||Tax free for anyone||Marginal Income tax|
Dr. Ros Altmann
8 May 2013