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Grim Reaper
02 Oct

5 Things To Know About The Scrapping Of The “Death Tax”

 Grim Reaper

The big news to come out of the Conservative party conference this week was the announcement by George Osborne that the death tax on drawdown pensions of 55% would be scrapped.

Expected to affect nearly half a million people, this move could help those looking to pass on some of their pension pots to their families. We take a look at exactly what there is to know about the scrapping of the death tax in 5 quick and simple points.

 

1. Your age at death still changes matters

As was the case before, whether the death occurs before or after the threshold of 75 years of age is still important. We’ve summed up what the changes mean with regards to the age at death in the table just below:

    Under The Current Rules Under The New Rules
       
Lump Sum With Death Pre-75   Uncrystalised funds can be taken tax-free, while crystalised funds face 55% tax The whole lump sum is tax-free
       
Income With Death Pre-75   This option is taxed as income and only available to dependents If taken on a new flexible income, this option is tax-free and it is also available to all
       
Lump Sum With Death Post-75   Subject to 55% tax rate Subject to 45% tax rate, with a marginal rate from 2016/17 onwards
       
Income With Death Post-75   This option is taxed as income and only available to dependents This option is still taxed as income, but now available to all

 

 

 2. The change will benefit more than 400,000 people with drawdown pensions

Currently over 400,000 people in the UK have drawdown pensions invested in the stock market and take a drawdown pension when they retire. These are the people who will benefit from the end of the “death tax” as these people will be able to leave behind their remaining savings to loved ones.

Drawdown pensions are often seen as being more attractive than annuities which are a one-off purchase of a lifetime retirement income and the new rules will likely make drawdown pensions even more desirable.

Some in the industry have welcomed the changes, but also called for similar treatment to be applied to annuity retirement incomes. Friends Life Chief Executive Andy Briggs is one who has made such a call, saying: “For those reaching retirement one of the worries about drawdown has now been taken away, but to ensure a level playing field we believe the Government needs to clarify that the same tax treatment can be applied to lump-sum death benefits paid from an annuity contract.”

  

3. The new rules will come into play next April

It is understood that the new rules on inheriting pensions will apply to payments made from April 6th 2015.

It’s important to note that the date of death is not the key date here, but rather the date of the payments, meaning that any payment of death benefits which can be delayed until after the rule changes next April will allow the beneficiary to take advantage of the new rules that are coming.

 

4. More sensible retirement spending is expected to be one result

The scrapping of the death tax is expected to encourage more sensible spending in retirement. Currently, the tax system could be said to penalise those who sensibly spend in their retirement and keep a large reserve, while those who spend a little more recklessly and run down their pension pot benefit.

With the changes, however, those who die without exhausting their whole pension pot will be able to leave what’s left behind for their families without 55% of it disappearing instantly.

 

5. There is now a greater incentive to save

The fact that a pension can now be seen as more of an investment for the whole family is also expected to encourage saving ahead of retirement.

Coupled with the introduction of auto enrolment, it is forecast that those retiring in the future will have a much larger pension pot than the generation before based on the fact that they are expected to have started saving earlier and the fact that they see the full benefits of a large pension pot since an early death will no longer see 55% of that pot leave their family.

Standard Life sum the situation up, saying: “Taken with all the other pension changes coming in April 2015, this creates a genuine incentive to save, knowing that family members can benefit from the remaining fund. It means that a pension will become a family savings plan, enabling one generation to support the next.”

 

For more information about retirement planning, please check out DAM's retirement planning information.

Photo credit goes to Newsbie Pix

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