Focus 97 – Changes to the 55% Pension Lump Sum Death Tax

At the conservative party conference George Osborne announced the changes to the lump sum death benefits tax charges. The changes were announced in advance of the expected date which had been stated to be the Autumn Statement on the 3rd December.

This is a positive move but we wait to see the legislation

The changes announced have not been put into any legislation yet so we await full details to clarify our understanding. The changes are only applicable to defined contributions schemes that have not been used to purchase an annuity or are being paid through a scheme pension.

Currently if member dies before age 75 and before taking their benefits, a lump sum can be paid tax free. But where they have taken their benefits or they die after the age of 75, a 55% tax charge would be applicable to any lump sum paid. If the fund was passed onto a financial dependent in the form of a ย pension, any income would be subject to income tax at their marginal rate, although there would be no upfront tax charge.

Proposed changes for those under age 75

For those that are under the age of 75 it is now proposed to be possible to leave drawn or undrawn funds to any beneficiary tax free. This can be in the form of a lump sum or pension, where they will be able to draw tax free income as and when they need it. This should mean the remaining funds will continue to grow tax free within the pension wrapper.

Post age 75

Again there are changes to those who are 75 and over. The 55% tax charge on lump sums has been replaced by a 45% tax charge, which is going to be consulted on with a view to moving this to the marginal rate of the beneficiary.

If the fund is left to a beneficiaryโ€™s pension, then there is proposed to be no upfront tax charge and any income will be taxed at their marginal rate when taken through drawdown.

Comments

This is a positive move but we wait to see the legislation in case there are any hidden implications or miscommunication from the statements of today.

We will also need to see the legislation to confirm if these changes will be retrospectively applicable, as stated in the speech or only available to members who die after 5th April 2015.

Read the full statement here on Gov.uk