Changes to taxation of pensions on death

Hot on the heels of the relaxation of the rules on pension drawdown last year, the Chancellor announced that he intends to abolish the 55% tax charged in certain circumstances on the balance of undrawn pension funds at death. This creates further flexibility in pension planning which should now be given greater priority in your financial plan.

At present a pension fund can only be passed down tax free on death if the individual has not drawn anything from it, including the tax free sum, and is aged under 75 on death, otherwise there is a 55% tax charge on the fund. This has prompted some individuals to draw down the maximum amount available each year during their lifetime on the basis it only suffers a maximum 45% income tax charge. There are however restrictions on how much can be drawn out of the fund each year during an individual’s lifetime, but these restrictions are set to be removed from April 2015.

Now that the 55% tax charge is due to be abolished from April 2015 it will prompt those drawing a pension to reconsider the amount they draw, safe in the knowledge that what they leave behind will not suffer a tax charge on their death and can be passed down. Under these new rules if the death occurs before the age of 75 then the undrawn fund can be withdrawn in full by the beneficiaries tax free but a death after 75 results in an income tax charge on the beneficiaries as they draw it down.

If the fund is not fully drawn down by the beneficiaries in their lifetime then it can pass down to the next generation on their death, thereby creating a situation where pension planning today can be beneficial for a number of generations. These are clearly quite progressive changes and will offer much more scope on pension planning in the years to come. It will also remove one of the biggest criticisms of pension schemes, the restricted access to the fund which currently exists.