Out-Law News | 30 Sep 2014 | 10:55 am | 2 min. read
The change applies from April 2015 to the remaining funds in a DC pension which is in a drawdown account or 'uncrystalised', or not yet accessed. The nominated beneficiary will be able to access those funds flexibly, at any age, and will only be liable for tax at their marginal rate of income tax if the pension holder was aged 75 or over.
The change will also cover value protected annuities, but not standard annuities or scheme pensions, the Treasury has confirmed.
"This latest reform will please those concerned that pension savings are paid into a 'black hole' and cannot be passed on to relatives after their death," said pensions expert Helen Hanbidge of Pinsent Masons, the law firm behind Out-Law.com. "The change will build on the Budget announcements which make DC schemes a bit more appealing to savers."
"It is not clear how many people would actually benefit from this reform, though. It is likely to be only the better off. The Treasury claims that the removal of the 55% tax has the potential to benefit some 12 million people in the UK, but those on lower incomes will not be able to leave pension savings untouched to pass on when they die," she said.
From April 2015, members of DC pension schemes will be able to access their savings in any way that they wish once they reach the age of 55 without necessarily having to purchase an annuity, subject to their marginal rate of income tax. Savers will still be able to withdraw up to 25% of the value of their pension pot tax-fee on retirement; and will continue to be able to purchase an annuity to give them a guaranteed income for the rest of their life with all or part of their pension pot if they choose to do so.
The latest announcement will enable individuals with a drawdown arrangement in place, allowing them to access their savings while keeping the balance invested; or those with uncrystalised pension funds, to nominate a beneficiary to pass their pension to if they die. Different rules will apply depending on whether the individual dies before they reach the age of 75, or if they are aged 75 or older when they die.
Under the new system, anyone who dies below the age of 75 will be able to nominate anyone, regardless of whether they are a dependant or not, to receive their remaining funds which are untouched or which are in a drawdown account completely tax free. The funds must be 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 DC 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. According to the Treasury, the government intends to reduce this flat rate tax change to the marginal rate, and is hoping to introduce this from April 2016 following consultation with the pensions industry. All pension savings are subject to the Lifetime Allowance, which is currently £1.25 million.
Under the current system, a 55% tax charge applies to inherited pensions unless the pension is passed to a dependent such as 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 under 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.
Editor's note 30/09/14: This story has been updated to reflect the fact that the change will also apply to value protected annuities.