29th September 2014 at 11:59am
The savings revolution continued today, with fantastic news that the 55% pension death tax is to be scrapped from April 2015.
Back in May, we called for the flat rate 55% death benefit tax to be reduced * and replaced with a rate that was fairer and linked to someone’s overall wealth. We’re delighted that the new proposals ** take this fresh approach, which takes account of a person’s overall wealth rather than a “one size fits all” tax policy. This is good news for savers – less tax and more money to support your loved ones.
As I wrote about in my previous blog on this topic*, a 55% tax charge could apply in some situations, particularly where someone dies aged 75+.
So it’s good news that this high and unfair tax rate is to be abolished from April 2015. Today’s proposals involve two main elements linked to the age of 75 :
- There would be no tax to pay on an inherited pension fund where someone dies before age 75. In the past, this might have been 55% – so 55% to 0% is a really welcome change.
- Where someone dies after age 75, the rate of tax due on the pension fund would depend on the income tax position of the person inheriting the pension. The normal income tax rates of 0%, 20%, 40% or 45% would therefore apply, depending on what income the person had.
Your family savings plan
Our research shows that being able to leave pension funds for your loved ones is a priority for people – 71% said that was a very important consideration.Our research shows that being able to leave pension funds for your loved ones is a priority for people – 71% said that was a very important consideration. Taken with all the other pension changes coming in April 2015, this creates a genuine incentive to save, knowing your loved ones can benefit too. It means that a pension is becoming a family savings plan, enabling one generation to support the next.
These changes won’t apply to all pensions
The scope of these new rules is limited to the type of pension you save into which builds a ‘pot’ of savings. In other words, it doesn’t apply to annuities, or “defined benefit” pensions which give you an income linked to a former salary and years of service.
All eyes on 3rd December
It’s worth stressing that more detail is awaited, particularly on the operational elements of how the new rules will work in practice. And there’s more to come on a possible lump sum charge of 45% which might apply in some situations. The next step is to see the full details in the Autumn Statement on 3rd December. And we’ll have an update for you then on the final pieces of the pensions reform jigsaw, as it all starts to slot into place. Watch this space.
The information in this blog or any response to comments should not be regarded as financial advice.
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Laws and tax rules may change in the future. The information here is based on our understanding in September 2014. Your personal circumstances also have an impact on tax treatment.
A personal pension is an investment. Its value can go up or down and may be worth less than you paid in.