Changes to Pension Death Benefits

17th October 2014

In September the Chancellor announced that, with effect from April 2015, individuals will have the freedom to pass on their unused defined contribution pension (pretty much any pension arrangement other than a company final salary scheme) lump sum to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pension lump sums passed on at death.

However further analysis indicates that the proposed reforms to pensions death lump sums and withdrawals may not necessarily lead to the significant differences which have been predicted in recent media coverage.

Our take on the rules is that where investors die before age 75 their pension monies can be paid tax-free. However, where death occurs after 75 the lump sum will be taxable (at a rate of 45% in 2015/16 and then taxed at the beneficiary’s marginal rate from 2016/17 onwards).

According to the Office of National Statistics in 2013, 141,932 people died between the ages of 55 and 75, with 389,360 dying after age 75. On this basis, for every investor who passes their benefits on tax-free, there will be almost three where the surviving beneficiary will be potentially liable for taxation.

While it is still not clear how the beneficary’s ‘marginal rate’ taxation will work in practice our view is that it will be added to any other income earned by the beneficiary. If we are correct, then higher and even additional rate taxation could be applied to any lump sum withdrawals.

If you wish to discuss how these changes might affect you and whether you should be taking any action please call us.