Pensions, Death and Tax

The Chancellor has outlined his plans for the tax treatment of pension death benefits.

The treatment of death benefits was one of the key aspects of the planned pension reforms which was left unresolved after the initial post-Budget consultation process. The Treasury had said that this was “a complex area and any changes have the potential for unforeseen and unintended consequences” and promised to “confirm its intention at Autumn Statement 2014”.

It was therefore a surprise when the Chancellor made an announcement on pension death benefits in his speech to the Conservative Party conference at the end of September. The Treasury duly issued out a press release, but its contents were far from clear, suggesting that the whole process had been rushed. The intended position for payments of lump death benefits made after 5 April 2015 appears to be as follows:

  • If you die before age 75 with a money purchase pension fund which is uncrystallised (i.e. untouched) or in drawdown, the fund can be paid “to anyone as a lump sum completely tax free”.  Currently a 55% tax charge applies to funds in drawdown, but uncrystallised funds are untaxed.
  •  On death on or after age 75, it will be possible to pass the remaining fund (uncrystallised or in drawdown) “to any beneficiary who will then be able to draw down on it at their marginal rate of income tax.” The Treasury says “beneficiaries will also have the option of receiving the pension as a lump sum payment, subject to a tax charge of 45%.” However, this would seem to be an interim measure for 2015/16 only as the Treasury states that “The Government intends to also make lump-sum payments subject to tax at the marginal rate (not a flat rate charge of 45%). It will engage with pension industry in order to put this regime in place for 2016-17.” At present all lump sum death benefits arising on or after age 75 are subject to 55% tax.

These proposals only apply to uncrystallised money purchase funds and drawdown funds: they not apply to defined benefit pension schemes, scheme pensions or most types of annuity. On the face of it, their end result is likely to be that pensions will play an even greater part in your estate planning. But given the confusing nature of the announcement, for now it is very much a case of watch this space.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

24th October 2014

Comments are closed.