Out-Law News | 02 Oct 2014 | 11:08 am | 1 min. read
This week the chancellor announced that from 6 April 2015, individuals would be able to pass on unused defined contribution (DC) pension savings when they die to a beneficiary who need not necessarily be a dependant or relative without paying the current 55% tax charge. In a note issued to advisers, the Treasury confirmed that the 6 April date referred to the date of payment, rather than the date of the pension scheme member's death.
"Scheme administrators should therefore consider delaying the payment of death benefits that would be treated more favourably under the new regime," said pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com.
"However, bear in mind that certain tax-free lump sum death benefits where the member died under age 75 must be paid within two years of the scheme administrator learning of the member's death - otherwise, these will be unauthorised payments and tax charges will be payable," he said.
The change was announced by George Osborne at this week's Conservative Party conference, and will apply to individuals with drawdown arrangements in place or those with 'uncrystallised' pension funds. It will also cover annuity protection lump sums and certain death benefits from defined benefit (DB) arrangements, but not pensions payable on the member’s death under an annuity contract or under a defined benefit arrangement.
If the individual dies before the age of 75, the beneficiary will be able to access the remaining pension completely tax free provided that this is paid out in lump sums or taken through a flexi-access drawdown account. Beneficiaries of those who die aged 75 or over will be able to draw down on the remaining pension at their marginal rate of income tax. Beneficiaries will also have the option of receiving the whole pension as a lump sum payment, subject to a tax charge of 45%, if the deceased was over 75 or tax-free if the deceased was younger.
Under the current system a 55% tax charge is applied to inherited pensions unless the pension is passed to a dependant such as a spouse, civil partner or child under the age of 23. Dependants can draw down from the pension at their marginal rate of income tax. If the deceased dies before the age of 75 and the pension has not been touched, it can be paid out as a lump sum completely tax free up to the lifetime allowance.