The good news on pensions just keeps on coming. Today, at the Conservative Party Conference in Birmingham, George Osborne will today announce the abolition of the draconian 55 per cent pension death tax. There’ll be no inheritance or income tax if funds passed on as pension. There had been expectations of this being cut, perhaps to 40 per cent, but the Chancellor has decided to abolish this altogether.
I gather this wasn’t due to be announced until the Autumn Statement on 3 December, but the Chancellor has brought the news forward to gather some positive headlines. A chunk of his speech has been trailed:
“People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free. Not a promise for the next Conservative government – but put in place by Conservatives in Government now.”
Here’s my take of what this change means:-
1. This will help deter people from spending pension funds too soon: This will encourage more people to keep more money in their pension funds for longer. This should benefit them in later life, especially if they need to pay for care. It will deter people from spending their pension money straight away, since money withdrawn will be subject to income tax.
2. It’s another reason not to buy an annuity: These new measures are also another nail in the coffin for annuities. Any money that has been used to buy an annuity cannot normally be passed on to the next generation (unless there is a guarantee attached) whereas funds in drawdown can pass on free of tax in future.
3. Currently, if you die after age 75, pensions are taxed at 55 per cent – in future it’ll be tax free if kept in a pension: Under the existing rules, anyone who dies over age 75 can only pass on their pension fund tax free to a spouse or dependent under 23 years of age, but passing on to older children or grandchildren attracts a draconian 55% tax charge. In future, all inherited pension funds will be free of tax if they are kept as pension savings. If their heirs then take money out of the fund, they will just pay income tax at their marginal rate, which is far lower than the current 55% of course.
4. Currently, if you die BEFORE age 75, you can only pass on pensions tax-free if untouched: If people pass away before age 75, they can only currently pass on their pension fund tax free if it has not been touched. If they have taken out tax free cash and the fund is in income drawdown, then the 55% tax is still charged. Under Osborne’s new rules, these funds will all pass on tax free, whether or not the pension saver has already used some of their pension money.
5. Only the wealthiest can usually afford not to touch their pension before age 75, so Osborne’s annouceent is good news for ordinary savers: This is good news for ordinary savers, who often will not be able to afford to leave their pension funds untouched until age 75. The existing rules disproportionately benefitted the wealthiest, but now every pension saver, regardless of their means, will know that their hard-earned savings can pass on to their loved ones without the current unfair tax penalty.
6. Only tax-free if kept as a pension – otherwise will be subject to marginal tax: The pension funds will only stay tax-free if the money is kept in a pension fund. If those who inherit the funds want or need to spend the money, for example to help them onto the housing ladder, repay large debts or fund education, they will just have to pay tax at their marginal rate on any amounts taken out.
7. This will encourage more money to stay inside pensions: There has been much concern expressed about the recent pension reforms encouraging people to spend their pension funds too soon, leaving them in poverty later on. These tax changes will provide a significant incentive for people to keep their money in the pension fund, where it can earn tax free returns, until they really need it. This will help them if they live longer than expected, but could also provide a source of funding for care needs in later life, should this be required.
My summary of the changes:
|Die before age 75Old system||Die after age 75Old system||Die before age 75New system||Die after age 75New system|
|Pension fund passed on (as a pension) if no money yet withdrawn||Tax free||55% tax||Tax free||Tax free|
|Pension fund passed on (as a pension) if tax free cash taken or in drawdown||55% tax||55% tax||Tax free||Tax free|
|Tax payable if funds passed on are spent rather than kept in a pension||Marginal Income tax||55% tax||Tax free for anyone||Income tax|
And it amounts to a £150 million tax cut, says the Treasury, and will benefit 320,000. We’ll find out in its December statement how this will be paid for.