UK pension rules are expected to undergo further changes following George Osborne’s recent announcement at the Conservative conference. These changes are likely to to be confirmed in the autumn statement (3rd December 2014) and subsequently enacted from April 2015. This has now come to pass.
Following major pension changes announced in the 2014 UK budget the stance on UK death tax almost completes some of the largest pension alterations in a generation. The final part concerns QROPS rule changes which are still undergoing consultation.
The proposals of what happens to a pension pot upon the policy holder dying are as follows;
- The terms of the annuity will apply. This normally involves no further funds being available for any potential beneficiaries
- These pensions, commonly known as final salary schemes, can continue to pay an ongoing income (typically at a reduced rate) to a spouse, civil partner or dependant child under 23. Further to this no additional payment is usually made
- Very infrequently, according to a scheme’s rules, it may pay out to a third party who is neither the member, their spouse, civil partner or dependant child under 23. In these circumstances an unauthorised payment charge of 55% will apply
- Beneficiaries can keep the pension invested
- If they withdraw the full amount as a single payment then there will be a tax charge of 45%
- When funds are withdrawn in any other manner (via smaller lump sums or as an income) then tax will be due at the beneficiaries’ marginal tax rate
- Any lump sum may be subject to a tax charge of 45% irrespective of whether the member was under 75 at the time of death or not
- Should you take an income payment (via drawdown or an annuity) the beneficiary may be taxed at their marginal tax rate irrespective of the member’s age on death
On the whole this is good news and will hopefully encourage people to save more into pension schemes. In comparison to the previous rules these proposals can increase the flexibility of how beneficiaries receive pension funds on death with no foreseen negative implications.
As before, spouses and dependent children under 23 years old can receive a pension fund tax free on death. However, pension holders should, from April 2015, be able to nominate anyone as a beneficiary in comparison to the stricter rules that are currently adopted. Above and beyond this;
- Beneficiaries will no longer be subject to a flat 55% tax charge upon death
- Income, previously available to dependents, no longer has to attract tax at the marginal rate
- Beneficiaries can keep money invested in the tax efficient pension structure
This all presents some major potential benefits for beneficiaries of pensionable assets.