30 Sep 2014

Chancellor announces new rules for passing on pensions

Chancellor announces new rules for passing on pensions

Peter Mutch, Corporate Benefits Director, analyses the impact of Chancellor George Osborne’s announcement concerning further changes to pensions.

Peter Mutch, Corporate Benefits Director, analyses the impact of Chancellor George Osborne’s announcement concerning further changes to pensions.

At one time, a pension existed purely to provide an income in later life. However, under the Chancellor's proposals, a pension fund could become a new tax-efficient savings vehicle, something that will be particularly attractive to those with large savings. More than that, it will be possible to pass the pension pot on from generation to generation, just like the family china.

What's changing?

Your age at death will still determine how your pension death benefits are treated. The age 75 threshold remains, however some very welcome amendments have been made.

Death before 75: The pension fund can be taken tax free, at any time, whether in instalments, or as a one-off lump sum. This will apply to both crystallised and uncrystallised funds, which means those in drawdown will see their potential tax charge on death cut from 55% to zero overnight. Using the fund to provide beneficiaries with a sustainable stream of income allows it to potentially grow tax free, while remaining outside their estate for Inheritance Tax.

Death after 75: Defined Contribution Pension savers will be able to nominate who ‘inherits' their remaining pension fund. This fund can then be taken under the new pension flexibility and will be taxed at the beneficiary's marginal rate as they draw income from it. Alternatively, they'll be able to take it as a lump sum minus a 45% tax charge.

What does this mean for advice?

Taken with all the other pension changes coming in April 2015, this creates a genuine incentive to save, knowing that family members can benefit from the remaining fund. It means that a pension will become a family savings plan, enabling one generation to support the next.

The current 55% tax charge on death acts as a penalty for scheme members who take a sustainable income from their pension pot. The only way to delay this charge is for a surviving dependant to continue taking an income from the fund. The option of taking a lump sum is often overlooked in favour of postponing the tax charge until the dependant's death. The new rules will mean that beneficiaries, other than dependants, may now benefit from the remaining fund, without suffering a 55% tax charge penalty.

Death before the age of 75 offers the option of a tax free lump sum. It also allows the fund to remain within the pension wrapper, which the beneficiaries would have flexible access to. Nominating a loved one to take over the flexible pension pot will also be a popular choice when death occurs after this age. These changes will standardise the death benefit treatment for the different flexible income options from April 2015. There won't, for example, be any difference between taking phased flexi-drawdown or phased withdrawal, as crystallised and uncrystallised funds will be treated the same on death.

It will become even more important that Death Benefit Instructions mirror the scheme member's wishes. A nomination or expression of wish will help to guide the scheme trustees in their decision making. You wouldn't knowingly entrust what happens to your home or other assets on death to a stranger. If there are no instructions in place, you're relying on the pension scheme trustees to second guess your intentions and with such wholesale changes to the death benefit rules to come, clients will need to revisit existing nominations.

All eyes on 3rd December 2014

It's worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. The next step is to see the full details in the Autumn Statement on 3rd December 2014.

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