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29 September, 2014   |   By David Trenner   |   Blog


Osborn abolishes tax on death in drawdown- almost

Having promised something in the Autumn Statement, George Osborne has brought forward the announcement of a reduction in the 55% tax on payments following death in drawdown.

The 55% tax rate replaced one of 35% which applied up to 2011, and in many cases was seen as unfair on taxpayers who had never paid more than basic rate tax in their lifetimes.

The measure is to be welcomed, as it should encourage savers to put more into their pension funds, safe in the knowledge that the funds will now be accessible whether they die early or live for many years in retirement.

In nearly 9 years since Simplification politicians have done their utmost to complicate pensions, so we should not be surprised that Mr Osborne’s announcement was not simple. These are the changes:

  1. No changes to payments made before April 2015.

  2. This tax cut will apply to all payments made after April 2015. This seems to suggest that if death has already occurred, or occurs between now and April, the new rules can be applied by deferring the payment if the beneficiary can afford to do this.

  3. Death post April 2015 but pre 75 “completely tax free”: “The person receiving the pension will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.”

  4. Death post April 2015 and also post 75: “The nominated beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax. There are no restrictions on how much of the pension fund the beneficiary can withdraw at any one time. There will also be an option to receive the pension as a lump sum payment, subject to a tax charge of 45%.”

  5. The Government intends to also make lump-sum payments subject to tax at the marginal rate (not a flat rate charge of 45%). It will engage with pension industry in order to put this regime in place for 2016-17.

For most people these new rules will increase the need for advice, and this advice may need to dovetail with Inheritance Tax planning for those with larger estates.