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.
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