Posted by Nick Day on 02 Oct 2014
Pensions – 55% “Death Tax” Abolished
The positive news keeps on arriving for people that have built up UK pension funds.
Following on from recent announcements of favourable changes to the flexibility of pension plans, the Treasury has confirmed that the Government intends to alter the rules relating to tax charges that currently apply to Defined Contribution (DC) pension pots inherited when someone dies.
Under present rules, a 55% tax charge applies where pension lump sums from DC funds are paid out on death if the pension is in drawdown phase (regardless of age at death), or if it has remained untouched but the individual is 75 or over at the time of death.
Under the new rules, if someone dies before age 75, any remaining DC pension pot will be inherited on a tax-free basis. The individual inheriting the pension fund will not pay tax on it whether accessed as a lump sum payment or through drawdown.
For those that die aged 75 or over where the pension fund is in drawdown phase or untouched, it will be possible to nominate a beneficiary on death and this beneficiary will be able to access the funds on a flexible basis whenever they like. They will pay tax at their marginal rate (20% for the majority of the UK population) unless they take a single lump sum, when a 45% tax rate will apply.
This is a brief summary of our understanding of the position based on Treasury news issued to date but more information should follow in the Chancellor’s Autumn Statement on 3 December.
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