The inter-generational pension plan
23 December 2014
At the end of September the Chancellor surprised many people by announcing at the Conservative Party conference new rules for the treatment of money purchase death benefits from April 2016. Among those caught on the hop was the Treasury, which issued a rushed press release that was widely criticised as confusing matters further.
In mid-October the government introduced the Taxation of Pensions Bill to parliament, but this made fewer changes to death benefits than had been suggested by Mr Osborne and the Treasury. The missing detail emerged in early November with a raft of amendments tabled by David Gauke, Financial Secretary to the Treasury. The main effect of these for money purchase pension schemes is that from 6 April 2015:
On death before age 75:
- There will normally be no tax charge on any lump sum payment, whether or not an income was being drawn;
- Alternatively any unused or drawdown fund remaining on death may be used to provide tax-free flexi-access drawdown income for any dependant(s) or nominee(s) of the deceased.
If death occurs on or after age 75:
- There will generally be a flat 45% tax charge on any lump sum payment;
- Alternatively the fund remaining on death may be used to provide taxable flexi-access drawdown income for any dependant(s) or nominee(s) of the deceased.
- On the death of a flexi-access drawdown recipient, be it a dependant or nominee, the options (and tax treatment) are the same for passing on the residual fund to the recipient’s nominee(s).
- The same tax rules will apply thereafter to all successive beneficiaries as the fund moves down through generations, until it is paid out as a lump sum or exhausted by withdrawals.
The consequences of these changes are still being thought through and you should not consider taking any action until the legislation is finalised. However, it does already appear that the estate planning role of pensions is set to increase further and your existing planning may need to be reviewed.