The things you can be certain of: Death, Taxes and Pension Reforms
We all heard the headlines about the new freedoms afforded to pensioners in drawdown from April this year and the good news for Lamborghini’s order book.
Another change which attracted far less coverage was the relaxation in the rules surrounding the treatment of pensions on death.
Out went the much maligned 55% ‘death tax’ charge, and in came an introduction of a more generous regime for the treatment of funds already in drawdown.
For those yet to draw on their pensions aged under 75, a tax free lump sum can be paid. Very little difference to the previous regime there then.
It is the treatment of funds already in drawdown which has changed fundamentally. These funds can now be passed on as a tax free lump sum if the pensioner is under age 75 and less a 45%* tax charge if the pensioner is over age 75. These are the funds which might have fallen under the old 55% tax charge regardless of age.
Even more interesting is the ability of a beneficiary to retain the funds within the tax efficient pension wrapper and draw an income as it suits. The taxation treatment of this income depends upon the age at death of the pensioner who passed it on. If under age 75 this income is tax free, if over 75 it is simply taxed as additional income in the beneficiaries hands.
This has got many members of our profession excited about pensions now being a very effective vehicle for passing wealth down the generations. At worst, pensions will only suffer tax at the recipients income tax rate on death which raises interesting questions around the order in which you might spend down your assets in retirement.
The change also challenges some of the advantages of Pilot Trusts for the nomination of pension death benefits. Funds can now remain outside of beneficiaries’ estates for inheritance tax simply by remaining within the pension environment without the need for a Trust.
Understandably, pension providers are taking a little time to get to grips with the new rules and their application. It has come to light that many existing nominations do not permit pension trustees to pay out an income to certain beneficiaries effectively forcing them to pay out a lump sum. This inability to use the new rules in full could lead to serious inefficiency with respect to inheritance tax further down the line.
Several of our preferred pension providers have refreshed their nomination documents to allow them maximum flexibility in terms of to whom, and in what form, pension death benefits can be paid. We are talking to all of our clients at their Forward Planning Meetings about their pension death benefit nominations to ensure that they remain fit for purpose in the new regime.
Managing legislative risk is simply another important part of our role as your Personal Finance Director. If you would like some help navigating the new pension rules or want to talk to us about passing wealth down the generations, why not get in touch?
*It is expected that this 45% tax charge will be reduced to the recipients marginal income tax rate from April 2016.