Death and Taxes

Death and Taxes

Brian Astridge, Independent Financial Adviser, Wren Sterling

You may have noticed recent headlines on the news that the Chancellor will be scrapping the pension ‘death tax’. But what does that mean? Is it the same as inheritance tax? And who will benefit?

Let’s take a look at the existing rules…

Currently the rules hinge on whether or not you have dipped into your pension.

If you are 75 or over and you have taken any income from your pension fund, whether through draw-down or through a lump sum, then any remaining funds left on your death will be taxed at 55%, (unless a surviving spouse or dependent children under 23 continue to take an income from it).The rules that apply to annuities purchased with a pension fund are different – see the box below for more information.

If you have never touched your pension, then currently the funds can be inherited tax free, but only if the pension owner is under 75 at their death.

So what’s new?

From April 2015, the new rules will come into force. The 55% tax rate will be scrapped!
If a pension owner dies before the age of 75, it will not matter whether or not they have dipped into their pension, the remaining funds can be inherited tax free and there will be no tax to pay by the beneficiary if he or she makes withdrawals from the scheme.

Of course, there is nothing certain in life except death and taxes, so there will still be some tax to pay if the pension owner dies after 75. In that case, the beneficiary of any remaining funds will pay tax, however it will be charged at their own top rate (marginal rate) of tax. The marginal rate of tax payable will be calculated by adding the monies received to the recipient’s current income. This means that for many people these additional funds could move them into a higher rate of tax, so careful planning is needed.

What next?

If you think that these proposed changes have an impact on your own financial planning, talk to your adviser or make contact with us.

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