Advisers have welcomed the news that Chancellor George Osborne is to abolish the 55 per cent pension tax on death, stating that it will open up new opportunities for advisers and adds “another layer to the planning process”.
The measure will apply to all payments made from April 2015, meaning that around 320,000 people who retire each year with defined contribution pension savings will be able to pass on their pension pot tax-free.
Under Mr Osborne’s proposal, if a person dies at any age there will be no tax to pay at all on any funds whether crystallised or otherwise, as long as the funds are kept in a pension. If death occurs under the age of 75, no tax will apply even if the fund is withdrawn as a lump sum.
If, however, a person dies aged over 75 and the funds passed on are spent rather than kept in a pension, marginal income tax will be due in line with the rules for pensions under new rules coming into effect in April.
Cleona Lira, chartered financial planner at Leeds-based 2 Plan Wealth Management, told FTAdviser that her clients have been apprehensive about their families having to pay for inheritance tax, so this news will be extremely well received.
“With drawdown being able to being passed to inheritors, tax free, it will really encourage clients to make the decision right for their own lifestyle,” she added.
Adrian Murphy, partner at Glasgow-based Murphy Wealth, commented that he had seen this coming since the Budget, as the 55 per cent tax seemed “incompatible” with the new at-retirement flexibilities.
“I would suggest it is a political move that appeals to older voters, however from an advisory point of view it further makes the positive case for pensions.
“From an advisory perspective it adds another layer to the planning process where pension benefits can be allocated to different individuals tax efficiently.”
Graeme Inglis, founder and director of Kirkcaldy-based Create and Prosper Financial Services, also welcomed the changes, but noted that the “devil may be in the detail”.
He said: “With the general consensus being that the 55 per cent tax charge would be lowered to 40 per cent, the news of a new 0 per cent rate is a surprise.
“From an advisory perspective it adds another layer of complexity to retirement planning, as clients are not only driven by maintaining their standard of living in retirement but also by minimising the amount of tax payable.
“The proposed change certainly makes pensions more attractive from a tax planning perspective and in particular when addressing estate planning or inheritance tax issues. I will wait on the detail that sits behind this proposal with baited breath.”
Justin King, chartered financial planner at Dorset-based MFP Wealth Management, told FTAdviser that the changes will create more opportunities for advisers being proactive in working with clients’ children, who will be the biggest beneficiaries of the smooth transfer of pension income.
“There are still questions that arise from this though, around whether they can amalgamate their parents pension income into their own pension funds, or how that process will practically work.”
Harry Katz, principal at Middlesex-based Norwest Consultants, said he was fed up with the chancellor’s ‘rabbit out of the hat tricks’ pointing out that many people will not have much left over if they live past their 80s.
“Annuities may be unpopular but they are a nil risk option guaranteed to pay out as long as you live and if you are wise and take out a joint life annuity with your spouse, then as long as the longest lived survives.
“Then of course many wrinklies may qualify for an impaired or enhanced terms. Leave it invested and we have a crash like in 2008 and you won’t be laughing at all! Take you pile out now and help the exchequer gain an early windfall.”
“If a pension is your only asset, then you have been poorly advised. Other assets can take up the slack.”
