Autumn Statement 2014: From April 2015, beneficiaries of individuals who die before the age of 75 with remaining uncrystallised or drawdown defined contribution pension funds, or who have a joint life or guaranteed-term annuity, will be able to receive any future payments from these policies tax free.
These changes, which will apply to where no payments have been made to the beneficiary before 6 April 2015, were originally announced by Chancellor George Osborne (pictured) on 29 September 2014.
This equalisation of ‘death taxes’ for annuities and income drawdown means more people can take advantage of annuity risk sharing.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “Confirmation that death benefits paid from annuities will enjoy the same tax treatment as income drawdown is a welcome equalisation of the new rules.
“It means investors will not be penalised for selecting the security and efficiency which an annuity offers.
“This will no doubt be a disappointment to any widow or widower who is already receiving a survivor’s pension and who will not benefit from the new tax exemption, however, it would have been a breach of accepted protocol if this tax break had been made retrospective.”
Apart from the proposed withdrawal of the 55% tax charge on inherited pension previously announced, the Autumn Statement contained no further significant changes to pensions.
Given the radical changes that were announced in the Budget earlier this year, it comes as somewhat of a relief that the Chancellor has refrained from interfering with pension rules any further ahead of April 2015.
There is still a lot of work to be done to implement and educate the public about the Budget changes, and the pensions providers and indeed the pensions industry as a whole will no doubt be breathing a collective sigh of relief due to the uneventful nature of today’s announcement.
Having heard so much from George Osborne on pensions over the last year, it is perhaps not surprising that there was very little left to say. In the Autumn statement the Chancellor confirmed the abolition of the 55% “death tax” on unused pension savings which had previously been announced in September.
But in the statement the tax-free treatment was also extended to payments made to a spouse under a joint-life annuity.
A notably generous giveaway around ISAs will benefit savers and the savings industry, as any ISAs can now pass to a spouse tax free, accompanied by a modest increase in the annual tax rate. We will have to wait until next week to get the long awaited details on the rates for Pensioner bonds which were first announced in the March Budget.
This levels the playing field between drawdown funds and annuities, but why won’t spouses’ pensions from occupational schemes also be tax-free where the member dies before 75?
The most likely answer is that, while only around one-third of annuities provide spouses’ benefits, these are standard issue in defined benefit schemes: the projected £155 million cost in 2016/17 would be quite a bit higher if all survivors’ benefits were treated in the same way.
However, if the Chancellor did intend to extend this treatment to spouses’ pensions, staggering the announcements would give him more bites of the cherry in terms of positive headlines.
The ONS projects that only 15% of men aged 65 this year will die before turning 75, so most survivors’ benefits from any sort of pension will remain taxable.