Defined Contribution Pensions Tax Changes 2015
Tax changes to pension payments on death from April 2015
Tax changes coming into effect this year could give families the chance to hold on to more of their wealth.
Amongst the raft of new measures coming into effect from April 2015 relating to taxation of pensions, is one that has perhaps had less attention in the media. It concerns defined contribution pensions.
The tax changes have important consequences for pensioners and their families. The new pension tax rules now offer greater flexibility and more choice in wealth management.
From 1st April 2015 anyone who has a defined contribution pension will be able to pass on their unused pension in the event of dying before the age of 75 years as a tax-free lump sum, instead of paying the 55% rate of tax previously charged. The lump sum can be passed to anyone of their choice not just a spouse.
Annuities – more freedom to pass on benefits
It will also now be possible to pass on payments from certain types of annuities tax-free as well. Annuity arrangements that continue to pay income after the death of the annuitant (these are called joint life and guaranteed annuities) will be free of tax if the policy holder dies below the age of 75 years.
People who die above the age of 75 with defined contribution pensions can pass the unspent portion to anyone of their choice. The person receiving the transferred benefit will be able to choose either to take it as as a lump sum taxed at 45% or as income in which case it will be subject to income tax at their normal rate of tax.
Withdrawals to be treated as income from April 2015
Withdrawals from a defined contribution pension after retirement, are going to be treated as income regardless of the amount withdrawn. Provided that the withdrawal takes place when you are 55 years or over the tax charge will be on the amount you actually withdraw and the amount of tax you will pay will depend on the amount of any other income you receive in the tax year when the withdrawal is made.
This replaces the previous rules which taxed withdrawals at 55%.
Possibilities for Inheritance Tax planning
The government estimates that about 18 million people will be able to take advantage of the more flexible pension rules that are coming into effect this year.
Those people who choose to take lump sums are likely to have spending plans for the money but for those who take the cash simply to invest it elsewhere they could be creating an IHT headache later down the line.
Any pension withdrawal should have a plan behind it and should take into account the effect of Inheritance tax on the person’s estate. So it could be a good moment to consider building in some inheritance tax planning if you don’t have immediate spending plans. Perhaps some lifetime gifts might be in order, or setting up a family trust.
If you don’t feel comfortable about giving large sums away during your lifetime you could consider a Flexible Reversionary Trust. Ask us for more details.
Give us a call and ask for a without obligation meeting to discuss your Inheritance tax planning options.
Chat to Rosamund Evans on 0115 7722129.
About the author: Rosamund Evans is a solicitor and registered trust and estate practitioner. Read more
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