Chancellor George Osborne is expected to abolish the 55 per cent pension death tax, meaning no inheritance or income tax if pension funds are passed.
At today’s (29 September) Conservative party conference, Mr Osborne is to announce that pension funds paid out before or after the age of 75 will no longer be subject to the 55 per cent tax charge when transferred as a lump sum within a pension.
The measure will apply to all payments made from next April and, according to FTAdviser sister publication the Financial Times, it is initially expected to cost the Treasury £150m.
As it currently stands, 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. And 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”.
Drawdown will also be able to be passed to inheritors as pension assets, tax free. If death occurs under the age of 75, no tax will apply even if the fund is withdrawn as a lump sum. After 75 marginal rate income tax will apply.
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.
Many in the industry were expecting the government to lower the rate to 40 per cent.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said that the tax rule changes will be a mixed blessing.
“They will encourage investors to take the maximum possible advantage of their pension contribution allowances, which is certainly a good thing.
“It is therefore likely to significantly boost demand for income drawdown in retirement and to diminish the relative attraction of annuities. It will also encourage investors to preserve their pension funds to meet the cost of care funding.
“However managing the withdrawal of income from a pension fund over the term of retirement is not simple. Annuities carry two important advantages: they provide a guarantee of income for the rest of an investor’s life, however long that may be; they also allow investors to benefit from the ‘mortality cross-subsidy’, by sharing out some of the value of the pensions of those who die young, they increase the payments to those who live longer.”
Ros Altmann, the government older worker’s champion, commented that the move will help deter people from spending pension funds too soon.
“These tax changes will provide a significant incentive for people to keep their money in the pension fund, where it can earn tax free returns, until they really need it. This will help them if they live longer than expected, but could also provide a source of funding for care needs in later life, should this be required.
“This is good news for ordinary savers, who often will not be able to afford to leave their pension funds untouched until age 75. The existing rules disproportionately benefitted the wealthiest, but now every pension saver, regardless of their means, will know that their hard-earned savings can pass on to their loved ones without the current unfair tax penalty.”
Mr McPhail added that as this announcement was not expected until the Autumn statement in December, “the timing and nature of the announcement may owe something to political expediency”.
