Skandia says most drawdown clients facing 55% death tax
A “worrying” level of people in retirement are not using their pension savings efficiently, which could result in their pension funds being hit by an unexpected 55 per cent tax charge on death, according to product provider Skandia.
Data provided by Skandia based on its drawdown customer base shows that 59 per cent of customers in capped drawdown are not taking an income. The firm said these are customers who have taken their maximum tax-free cash lump sum and then left the rest of their pension fund invested.
The remaining pension fund is technically in ‘drawdown’ as the lump sum has been taken, meaning the remaining fund would subject to a 55 per cent tax charge if paid as a lump sum to a beneficiary on the member’s death.
For those who die below age 75, this tax charge was increased from the 35 per cent under the unsecured pension regime that existed pre-April 2011 to 55 per cent. For those that die after the age of 75, the charge has been reduced from a potential 82 per cent under the previous alternatively secured pension rules.
Skandia said that a lack of financial advice could be at the root of members not taking an income. The company said taking an income and using alternative saving tools to secure inheritance funds could largely mitigate the 55 per cent tax liability.
If clients are under 75, it is only money held in ‘drawdown’ which is potentially subject to a 55 per cent tax charge on death under age 75 so untouched pension funds can be left to beneficiaries without any tax charge
For those aged 75 onwards, all money left in a pension is subject to a 55 per cent tax charge on death, regardless of whether the funds are in ‘drawdown’ or not, Skandia said.
The company said that those above 75 years old should therefore consider accessing as much of their pension fund as possible to move money outside of this 55 per cent tax charged environment.
Adrian Walker, head of retirement planning, said: “The number of people currently in drawdown and not taking an income highlights just how many people could benefit from further financial planning.
“We believe our statistics will be mirrored by a large extent across the industry, showing just how many people could be at risk of suffering a 55 per cent tax charge on death.
“The current economic climate is probably exacerbating the situation as people may be delaying taking an income until gilt yields and stock markets improve, as this could help secure them a higher income level.
“Delaying income could be part of someone’s long term financial plan, but if someone is unaware of the implications their actions have on death, their beneficiaries could be faced with an unexpected 55 per cent tax charge on part of those savings.”