Changes to taxation rules that will mean pension funds will be no longer subject to a 55 per cent pension tax ‘death charge’ has been described as a ‘game changer’ for financial planning after new details seemed to create a significant tax advantage for income drawdown.
Yesterday (29 September), FTAdviser reported on expert opinion that the individual annuity market would once again suffer at the hands of chancellor George Osborne, as pension funds in annuities can only be passed on if there is a guarantee attached.
Under rules announced at the Conservative Party conference by Mr Osborne, pension funds in drawdown will now attract no tax on death, with those under the age of 75 not even being taxed on withdrawals.
According to Hargreaves’ head of pension research Tom McPhail, further details confirmed verbally by the Treasury have further increased the disparate treatment of drawdown.
He said: “The Treasury have verbally confirmed to me today that money paid to dependants upon death before 75 will be completely tax free when paid from a drawdown plan.
“Dependants will be able to draw income or cash from their own drawdown pot without any tax to pay. After age 75, marginal rates of tax will apply to the beneficiary, in most cases lower than 40 per cent.
“This means that dependants’ pensions being paid today from drawdown plans will become tax free from next April.
“By contrast, dependants’ pensions from annuities and scheme pensions such as final salary schemes, will continue to be subject to income tax at the beneficiary’s marginal rate. We went back and checked this. Twice.
“This is a game changer and puts income drawdown at a significant tax advantage over annuity and occupational pension (including final salary) schemes.”
In a notice on the Treasury website, the government confirmed full details of the new rules, including:
• there will be no changes to the taxation of pension payments made before April 2015, clarifying confusion following statements from Mr Osborne that the rules would benefit savers “from today”;
• the tax cut will apply to all payments made after April 2015, but savers retiring today can ensure they fall under the new rules by delaying their payments until April 2015;
• post-April 2015 when death occurs pre-75 funds are passed on completely tax free and no tax is payable on withdrawals from that pension, whether taken as a single lump sum or accessed through drawdown; and
• post-75 no tax is payable when the pension is passed down, however the beneficiary will pay at their marginal rate of income tax on any withdrawals.
Pensions firm Intelligent Pensions added that the Treasury had also confirmed:
• if a beneficiary withdraws a pension passed on death post-age 75 as a lump sum, they will be subject to a 45 per cent tax charge; and
• the government intends to also make lump-sum payments subject to tax at the marginal rate and will engage with pension industry in order to put this regime in place for 2016-17.
David Trenner, technical director at Retirement Income Specialist Intelligent Pensions, said “The measure is to be welcomed, as it should encourage savers to put more into their pension funds, safe in the knowledge that the funds will now be accessible whether they die early or live for many years in retirement.
“For most people these new rules will increase the need for advice, and this advice may need to dovetail with Inheritance Tax planning for those with larger estates.”
Mr McPhail added: “Financial planning has been turned on its head. Under the current regime it makes sense to spend pension assets in drawdown as ultimately they would be subject to a 55 per cent tax charge on death, as opposed to non-pension assets at 40 per cent.
“Now investors may be advised to spend non-pension assets and preserve pension benefits in a drawdown plan.”
