NEWSLETTER: THE NEW PENSION DEATH TAXES FROM 6.4.15 EXPLAINED
Contributed by SIPP Specialists Limited
21 November, 2014
This newsletter is meant for financial and other professional advisers.
Members of the public should not rely upon it.
The Chancellor announced on 29th September that the tax payable by a pension fund when the member dies would be changed and in many cases would be reduced/abolished from 6th April 2015
Defined Contribution and Defined Benefit Schemes differences
It is important to note that the changes below apply specifically to defined contribution schemes. The main difference between the treatment of Defined Benefit (DB) and Defined Contribution (DC) Schemes under the new system will be where the beneficiary receives an income from a DB pension, where the deceased has died before age 75. In this case the income will be taxed at the recipient's marginal rate, whereas income from a beneficiarys drawdown pension would be tax-free. A number of options that scheme members may have will be dependent on the Rules of the DB Scheme.
The current position
If someone dies before taking any benefits, the whole of their fund is paid out under discretionary trust, with zero tax.
If they have started drawdown (which can mean just taking a pension commencement lump sum), then on their subsequent death:
a) their remaining crystallised pension fund is used to provide income drawdown to their surviving spouse or civil partner or dependant, such payments being liable for tax at their marginal income tax rate;
b) a lump sum is paid out to anybody at the discretion of the trustees, in which case tax is due at 55%, unless the payment is made to a pre-nominated charity in which case the tax is zero.
What is proposed from 6th April 2015?
The Treasury announcement can be found at:
In the new world, it will depend on whether somebody dies before or after 75.
Death before 75
If someone dies before age 75, then their remaining pension fund can be paid out either as a lump sum or as drawdown entirely tax free to anyone. It does not matter whether they were in drawdown or not - for everyone dying before age 75, the whole of their pension fund can be paid out tax free.
In order for the payment to be tax free it either has to be paid as a lump sum or as a flexi access drawdown.
The tax free option does NOT apply to scheme pensions or annuities (other than value protected annuities).
What is not clear is who is anyone? Is it someone nominated by the member or is it someone decided by the trustees under Discretionary Trust? Is it just one person or body (such as a charity) or can it be split between several people/bodies? One presumes the latter but it is not clear from the Treasury statement.
Death on or after 75
The Treasury statement says Anyone who dies with a drawdown arrangement or with uncrystallised pension funds at or over the age of 75 will also be able to nominate a beneficiary to pass their pension to.
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%.
What does this mean? Basically the remaining pension funds can be paid out via flexi access drawdown to the nominated beneficiary and they will pay tax on their drawings at their marginal rate of income tax. They have the option, if they prefer, to draw the whole amount out, but it would then be subject to tax at 45% (but see below).
As with the situation on death before 75, it raises various questions:
- What is meant by nominated beneficiary? It is implied that it is someone nominated by the member before they die.
- Is it just one person or can there be several nominated beneficiaries?
- Can the payment only be made to that nominated beneficiary?
- What if there is no nominated beneficiary? It appears that this will then be at the discretion of the trustees
- What if the nominated beneficiary is dead?
- What if it is known that since the nomination the members personal circumstances have changed and therefore, in the trustees view, the nominated beneficiary is no longer appropriate?
- How does all this square with the Discretionary Trust aspects of a pension scheme?
- The HM Treasury statement says also be able to nominate. Does the use of the word also imply that for deaths before age 75 payments can only be made to nominated beneficiaries rather than anyone?
The new 45% tax
The Treasury say that if, on death after age 75, the beneficiary receives their payment as a lump sum, then tax of 45% would be levied. They go on to advise that 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.
The 45% tax rate seems heavy handed and unnecessary. Consider the extremis situation - what if someone receives everything to which they are entitled except for £1. This presumably is subject to their marginal rate of tax, whereas if they had taken the extra £1, the tax would be 45%. That cannot be right.
Deaths before 6.4.15
The reforms apply to payments made on or after 6.4.15 not deaths on or after 6.4.15. Beneficiaries of people who die before 6.4.15 (including those who died before 29.9.14) can request that the Scheme Administrator delays payment to benefit from these changes though lump sum payments relating to those who died before age 75 must be made within 2 years of the Scheme Administrator being notified of their death.
The Lifetime Allowance of £1.25M still applies. If the members pension has not been tested against the LTA when they die, it will be done so as at the date of death, before being passed on. Any pension wealth that someone inherits will NOT count towards their own LTA.
So what next?
As always, the devil will be in the detail. We await the full HM guidance on the new death tax rules and hopefully they will answer all the above questions.
How we can help you
We have put together a 30 minute or so PowerPoint presentation that covers all the proposed changes in words of one (or in some cases two) syllables. We are happy to visit you to make this presentation to your staff and can supply CPD attendance certificates if required. We make no charge for this service other than we would appreciate a contribution to our travel costs.
Gilt Yield for Drawdown
The gilt yields to be used for drawdown calculations are:
We do not give financial advice and no comments here are intended as such. The above information is based on our understanding of the legislation governing pensions at the time of writing. Before taking any action you should consult a qualified financial and/or tax adviser. Levels, bases of and reliefs from taxation may be subject to change.
This Newsletter is intended for professional advisors only, not members of the general public
SIPP Specialists Ltd
Tel: 0151 328 0594
Fax: 0151 328 0707
« Go Back to Articles