Following a series of proposed changes to pension legislation, the Chancellor has recently announced that the 55% tax rate currently applied to pension death benefits is to be abolished from 6th April, 2015.

Under the current system, a 55% tax charge is levied where the value of a Defined Contribution pension (for example, a personal pension or SIPP) is paid out as a lump sum on the death of the pension holder where:

  • the pension is in ‘Income Drawdown’ or
  • the holder is aged 75 or over, regardless of whether a tax free lump sum or income has been drawn from the pension

The only exception is where the pension passes on the holder’s death to a dependant (for example, the holder’s spouse/civil partner or child under the age of 23). In this case, the recipient can draw an income from the fund, which is taxed at their marginal rate of income tax.

Pre age 75, where no tax free lump sum or income has been drawn from the pension, the entire fund can be paid out as a tax free lump sum on the holder’s death, subject to the Lifetime Allowance (currently £1.25m).

The rules post April 2015

Under the new rules, individuals below the age of 75 will be able to pass their entire pension to a named beneficiary free of tax (this may, or may not be a ‘dependant’), regardless of whether or not they have previously drawn the tax free lump sum or an income from their pension.

Individuals aged 75 and over will also be able to pass their fund to a beneficiary (or beneficiaries), dependant or otherwise, who will be able to draw an income from the fund, taxed at their marginal rate of income tax.

Alternatively, a lump sum can be paid, subject to a reduced tax charge of 45% from 2015/16. From 2016/17 the Government is proposing that the flat rate of 45% is removed and that lump sums are also taxed at the marginal rate of income tax.

The changes do not affect individuals already receiving income from traditional annuities and/or final salary pension schemes.

The more favourable treatment of pension death benefits provides a number of financial planning opportunities. For more information or for a review of your own personal circumstances, contact Springfield Financial Services on 01772 729742.