People will be able to pass on their pension pots to their families tax-free, George Osborne has announced.
Speaking at the Conservative Party conference, the chancellor announced he had abolished the “punitive” 55 per cent tax rate on drawdown pension funds. The new measure will apply to all inherited pensions received from April 2015.
He said: “People who have worked and saved all their lives will be able to pass on their hard earned pensions to their families tax-free.
“Children and grandchildren, and others who benefit, will get the same tax treatment on this income as any others, but only when they choose to draw it down.”
The measure means that, when a person aged 75 or over dies, beneficiaries will have to pay only their income tax rate, and only when they take money out of the pension.
In addition, there will be no restrictions on how much of the fund can be withdrawn at any one time.
There will be no tax to pay on an inherited pension fund where someone dies before the age of 75.
The plan has been described as a £150m pre-election sweetener, but Michael Johnson, spokesperson for the centre-right think tank the Centre for Policy Studies, called it “political desperation”.
Mr Johnson said: “This could put another nail in the coffin of pensions, because it makes the tax relief on paying into a pension seem irrelevant, and the Treasury might lose a valuable source of tax.
“It is chipping away at the whole integrity of what we call a pension product.”
However, Julie Hutchison, head of customer affairs at Standard Life, said: “It creates a genuine incentive to save, knowing your loved ones can benefit, too, and helping older family members support younger generations who find it harder to save.”
Duncan Buchanan, president of the Society of Pension Professionals, said: “We now have clarity and fairness for funds remaining in pension plans after death.
“The announcement should make it more attractive for savers who have started to draw down to leave retirement savings in their pension plans, only drawing them when needed.”
Nicholas Oliver, divisional director of financial planning at Brewin Dolphin, said the measure would make people think “more closely” about how they draw down from their accumulated funds.
He said: “With the previous tax regime, the balance of the argument led more to people decumulating their pensions at too fast a rate, as it was often more favourable to do this than leave the fund as a pension subject to 55 per cent tax.”
Reaction round-up
Simon Nicol, pension director at London-based Broadstone, said: “Members of generous final salary pension schemes approaching retirement now face a massive dilemma. Do they stay in their final salary scheme and enjoy their secure pension for life, but deny their children and grandchildren any benefit should they die earlier in retirement? Or do they transfer into a defined contribution pension savings account, which could provide their extended family with huge financial benefit – but which could leave them short of income if they live too long?”
Chris Williams, chief executive of Wealth Horizon, described the policy as “niche”, adding: “While, on the face of it, the idea will grab headlines, only a small number of people – those who retire with defined contribution pensions and die before the age of 75 – will actually benefit from it.
“While it is a step in the right direction, the government needs to look to encourage more saving and investment in preparation for retirement.
“This is where the heart of the problem lies, and unless it is addressed soon policies like the one announced today simply will not matter, as most people will not even have a pension to tax.”
Key points
David Trenner, technical director of Glasgow-based Intelligent Pensions, said: “In nearly nine years since simplification, politicians have done their utmost to complicate pensions, so we should not be surprised that Mr Osborne’s announcement was not simple.”
These are the key points:
■ There will be no changes to payments made before April 2015.
■ The tax cut will apply to all payments made after April 2015. This seems to suggest that, if death has already occurred or occurs between now and April, the new rules can be applied by deferring the payment, if the beneficiary can afford to do this.
■ Death after April 2015 but before the age of 75 is “completely tax free”: “The person receiving the pension will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum or accessed through drawdown.”
■ For death over the age of 75, tax is applied as follows: “The nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax. There are no restrictions on how much of the pension fund the beneficiary can withdraw at any one time. There will also be an option to receive the pension as a lump-sum payment, subject to a tax charge of 45 per cent.”
■ The government intends also to make lump-sum payments subject to tax at the marginal rate, rather than a flat rate charge of 45 per cent. It will engage with the pension industry in order to put this regime in place for 2016/17.
