George Osborne moves to end the 55% ‘death tax’ on pension pots in drawdown
On Monday this week the Chancellor, George Osborne, announced at the Tory Party Conference further changes to the UK pensions landscape. This follows the radical pension freedom reforms announced in the March 2014 budget. The new move to scrap the 55% ‘pension death tax’ on pension funds in drawdown could allow individuals to pass on their unused defined contribution (DC) pension to any nominated beneficiary, completely tax free.
The latest announcement should be positive for ‘drawdown providers’ as savers now have a bigger incentive to put their assets into the tax-free pensions wrapper. Annuity providers however, may experience more pain, after having seen their sales slump since the budget reforms were revealed earlier in the year. In a small concession, ‘value added annuities’ in which a lump sum is paid to beneficiaries on death will also see the tax removed.
A summary of the changes confirmed by HM Treasury:
- From next year, individuals with a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to pass their pension to if they die
- If the individual dies before they reach the age of 75, they will be able to give their remaining DC pension to anyone as a lump sum completely tax free, if it is in a drawdown account or uncrystallised
- The person receiving the pension will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown
- Anyone who dies with a drawdown arrangement or with uncrystallised pension funds at or over the age of 75 will also be able to nominate a beneficiary to pass their pension to
- The nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax
- There are no restrictions on how much of the pension fund the beneficiary can withdraw at any one time. There will also be an option to receive the pension as a lump sum payment, subject to a tax charge of 45%
Portrayed as a game changer for financial planning, this tax cut appears to put income drawdown at a significant tax advantage over annuities. It also addresses concerns raised after the March budget that pensioners might be tempted to ‘blow their entire pension savings on a Ferrari’ with the new freedoms. With around 320,000 people retiring each year with DC pension savings, the scrapping of the 55% death cap provides an incentive to conserve savings and pass them on to dependents.
Further details are likely to emerge over the coming weeks including the treatment of defined benefit (final salary) schemes under the new system. As always, the devil will be in the detail.