Personal Pension  

Death tax cut further benefits capped drawdown ‘loophole’

Some providers have predicted a further wave of advisers moving clients into capped drawdown pre-April 2015, following chancellor George Osborne’s announcement that he would abolish the 55 per cent pension death tax.

In August, FTAdviser reported that providers predicted more advisers may seek to move their clients into capped drawdown in advance of new pension freedoms coming into force next April, due to a carve-out in rules designed to close a tax loophole.

The reduction in the annual allowance to £10,000 will not apply to capped drawdown, so rules governing which will be ‘grandfathered’ into the new regime. This means that savers in capped drawdown before April 2015 will retain their £40,000 annual allowance.

Mr Osborne announced on 29 September that there would be no inheritance or income tax if pension funds are passed. 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.

Some providers have now predicted people moving into capped drawdown as a result of the most recent announcements on death tax.

Claire Trott, head of technical support at Talbot and Muir, said that there had been much discussion with advisers over the possibility of going into capped drawdown this tax year, to ensure that clients were not penalised regarding their annual allowance in the future.

Ms Trott said: “One of the big concerns about doing this was the impact on the death benefits, this however is now not likely to be an issue. Before the chancellor’s announcement, clients would have risked the loss of 45 per cent of their fund on death if not left as an income to a dependent, but left as a lump sum.

“The new rules mean that provided they die before age 75, then there is no change in the death benefits between crystallised and uncrystallised funds, meaning one of the hurdles to taking tax free cash now and entering capped drawdown to protect the ability to make additional contributions in the future, is gone.”

Ms Trott added that advisers were wary of recommending that clients enter capped drawdown without the real need for the tax free cash and income immediately, because of the detriment to the death benefits, despite the fact it would give them greater flexibility in the future.

She said: “Advisers will be more able to make this recommendation without the concern that their client might unexpectedly die and suffer a loss of 55 per cent of their fund value in tax charges that may otherwise have been avoided if the fund was left intact.

“I feel advisers who had previously dismissed this as an option will reconsider and engage with their clients over 55 who are likely to be in the position to make good use of a lump sum without restricting their future options. The money purchase annual allowance rules create a £30,000 reduction in the annual allowance so this could be very important for some.