Further details have emerged on the cut to death taxes announced earlier this week, which reveal the new rules will apply, at least in part, to lump sum death payments from defined benefit pension schemes.
Under rules announced at the Conservative Party conference by chancellor George 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.
Details of what this actually means are slowing coming to light.
A five-page Treasury document seen by FTAdviser, which was posted on a website for technical professionals and is not yet in the public domain, confirms that the change to the tax rate for DC savings taken as a lump sum “also applies to DB pensions”.
The changes mean lump sum payments to beneficiaries, where the scheme member dies after the age of 75, will be taxed at 45 per cent from April 2015 and at the marginal income tax rate from 2016-2017. Currently such payments are taxed at 55 per cent.
Lump sum payments, where a scheme member is under 75, will be tax-free where they are within the lifetime allowance, currently £1.25m, as is the case now. At the moment any amounts paid above the allowance are taxed at 55 per cent, but it is not yet clear what rate will apply to excess payments under the new system.
The difference between the treatment of DB and DC under the new system will be where a beneficiary receives an income from a DB pension where the member has died before age 75.
In this case tax will apply at the recipient’s marginal rate, while no tax would apply in a DC drawdown scheme. This is still likely to encourage some to transfer from DB schemes to DC alternatives.
For all cases, the document said there is no change in who may receive a dependant’s pension.
Simon Laight, a pensions expert at international law firm Pinsent Masons, said: “The new tax regime extends to annuity protection lump sums (lump sums payable under an annuity contract to a beneficiary following the member’s death).
“And the new tax regime also applies to death benefits from DB arrangements, except that dependants’ pensions from a DB arrangement will be taxed at the recipient’s marginal rate even if the member died before age 75.”
The document also confirms information which had already been confirmed in the wake of the announcement on Monday, including that protected annuity lump sums would also benefit from the change in tax rules.
