Annuity Rates, Annuities, Pensions, Divorce Free Fixed Term Quote
Home News Annuity Rates Annuities Pension Annuity Impaired Annuity Annuity Quotes Pensions Divorce Resources
 

3 October 2014 last updated

Drawdown to benefit as the government scraps 55% pension death tax

Flexi-access drawdown is more attractive than an annuity with tax free benefits on death before age 75 as the Chancellor has announced to scrap the 55% tax charge on pensions that are left to beneficiaries.

Under the current system on death before the age of 75 the income from an annuity to a spouse is taxed, but the proposed changes mean the income from drawdown to spouse, civil partner or beneficiary will be tax free.

Usually people take their tax free lump sum and income as an annuity or pension drawdown and for the latter on death the fund can pass to a partner without tax if it remains in the pension.

If it is taken as cash a 55% tax charge is applied. If there is no partner the fund would be paid to the estate and is subject to the 55% tax charge.

About 320,000 people retire each year and the decision is expected to attract more people to flexi-access drawdown as benefits can be passed on tax free.

 
Drawdown benefits from end to death tax
  Pension death tax of 55% to be scrapped giving flexible drawdown a boost at the cost to annuities
  More annuity topics
  Quarter 4 News 2014
  News & articles
  Archive news stories
  Flexi-access drawdown
  Annuity rates tables
  Outlook for 2016
  Annuity rates charts
  15-year gilt yields
  Latest annuity rates
 

Scrapping death tax to cost Treasury £150m

The 55% death tax is paid by people in flexible drawdown and those that have not taken their benefits that are aged 75 and over. The new ruling will cost the Treasury £150 million in lost taxes although the total amount of funds of £272 million is small compared to the overall market.

In the UK about 320,000 retire each year with about £12 billion of funds being taken as benefits. This change may make flexible drawdown more attractive to people retiring as now their family can benefit to a greater degree in the event of death.

The reduction in tax will be off-set by the increase in tax revenues from the new regulations to be introduced by the government from April 2015. The new rules will allow people retiring to take the tax free lump sum and then the remainder of the pension fund as cash less tax at their marginal rate. For many people this may mean spreading their fund over two tax years to avoid paying higher rate tax.

HMRC are expecting a further £320 million in the 2015-16 tax year rising to £1,220 million in 2018-19 before falling back to £810 million from 2019-20.

How the rules will change

The proposed changes allow benefits to be taken after 6 April 2015 by using flexi-access drawdown and on death before age 75, generous tax advantages for the beneficiaries. The following tables show the current tax situation and position after April 2015.


1 - The current system

Situation on death Die before 75 Die after 75
No benefits taken,
fund taken as lump sum
Tax Free 55% tax
In income drawdown,
fund taken as lump sum
55% tax 55% tax
Fund taken as income
by beneficiary
Marginal
income tax
Marginal
income tax


2 - From April 2015

Situation on death Die before 75 Die after 75
No benefits taken,
fund taken as lump sum
Tax Free 45% tax
In income drawdown,
fund taken as lump sum
Tax Free 45% tax
Fund taken as income
by beneficiary
Tax Free Marginal
income tax


The changes will mean on death a spouse, civil partner, dependant and perhaps any beneficiary can take the pension fund tax free as an income or lump sum.

This compares to an annuity where the fund is exchanged for an income. The income is paid to a spouse but on their death nothing to beneficiaries such as children. In addition, the income to a spouse would be taxed compared to flexi-access drawdown where on death before age 75 the income would be tax free.

New tax rules will apply to a fixed term annuity

These new rules will apply to anyone taking out a fixed term annuity and adding a 100% value protection option.

Value protection will guarantee that the original fund less income paid out would be returned to a partner with the option to purchase a fixed term annuity, flexi-access drawdown plan, annuity or to take the fund as cash at that time.

With a lower tax charge applied this further underlines the benefit of not buying an annuity. With an annuity a person exchanges the fund in return for an income paid over their lifetime. The only option to protect the income is to add a guaranteed period which is currently limited to 10 years.

Therefore on early death if is not possible to receive the original fund back less income received and for someone aged 65 up to 40% of the fund would be lost on death.

The new rules gives people greater flexibility and choice when they take their benefits. One of the objections to saving in a pension was the lack of choice at retirement. The new rules will allow people to save in a pension knowing they can access all their money currently from the age of 55 if required.

News related stories:
Flexi-access drawdown will be used by 130,000 people says HMRC
Pension savers to receive free guidance when taking their benefits
Annuity drawdown plan would offer greatest flexibility at retirement
Radical changes to pension annuities announced in Chancellor's Budget
Related internet links:
BBC - George Osborne to cut 55% pension death tax
Flexi-Access Drawdown
  Find out more about the benefits
of using flexi-access drawdown
 
 
  Yes Take control of your money
  Yes Easy access to income
  Yes 25% tax free cash
  Yes Benefits to your family
  Yes Keep your fund
 
  Flexi-access drawdown  
  Annuity Rates News:

Best annuity rates fall with lower yields
Best annuity rates fall Best annuity rates reduced by 1.91% following political uncertainty
Annuity income now 18% higher
Annuity income increase since all time low Income from annuities is higher by 18% since reaching the all time low last year
Annuities up 7% since Trump election
Pension annuities up as Donald Trump elected Pension annuities are up by 7% after the election Trump is elected President
UK annuities could rise 5% after selloff
UK annuities could rise with bons selloff Investors are selling US bonds sending yields and possibly annuities higher

  Follow Us:
You can follow the latest annuity updates on Twitter or as a fan on Facebook and Google+
  Facebook Page Twitter Page Twitter Page
Sharingpensions.co.uk   This website is for marketing purposes only and does not provide specific financial or legal advice. Website security issued by GeoTrust and Equifax. Copyright©2001-17 Sharingpensions.co.uk. All Rights Reserved