Standard Life is calling on the government to scrap the current 55 per cent flat rate tax on so-called ‘death benefits’ from pensions and instead move the charge in line with inheritance tax to make it “fairer”.
The government signalled change ahead for the 55 per cent tax charge as part of the Budget Day pension changes in March. In its consultation paper the government acknowledges that the 55 per cent tax charge can be too high in many cases.
Standard life believes the tax outcome should depend on the amount involved. Standard Life said this is a “fairer” model because the tax charge is reduced from 55 per cent to either 40 per cent or 0 per cent in line with IHT.
As usual with inheritance tax, whether tax is due will depend on the identity of the recipient and the overall wealth of the individual, Standard Life said.
Standard Life believes this context “creates a fairer outcome as those with smaller estates and pensions are less likely to have a tax charge under our model”.
The 55 per cent death benefit tax charge applies in two situations where a lump sum is paid out, most commonly with a self invested personal pension, the company said.
Where a person dies, aged over 75, the 55 per cent tax charge applies to the whole fund, regardless of whether the customer had taken any withdrawals from their pension yet or not.
Where a person dies before the age of 75 and had started to take withdrawals, it applies to the part of the pension which has been ‘touched’, known as “the crystallised fund”.
Julie Hutchison, Standard Life’s head of customer affairs, said: “We would like to see a simpler and fairer result for people and their families. And we believe this can be achieved by aligning the death benefit tax charge for crystallised funds to the IHT regime.
“In our proposal, the value of the pension fund would be aggregated with the estate. But who receives the pension fund is still something that would be managed by the pension provider with reference to any Expression of Wish form left by the customer.
“This creates more flexible results, especially for the many people who don’t put a Will in place. Naming a beneficiary for your pension is something people can do with a form which is easy to change and keep up-to-date as family circumstances change.”
Standard Life will be responding to the consultation paper which will shape the new rules for April 2015.
