The Conservative Party and chancellor George Osborne will scrap the 55% tax rate to which pension savings are subject on the death of a scheme member and introduce a new rate of around 20% to allow employees to leave more money to their children.
The change will be introduced in April 2015.
The chancellor is expected to officially announce the dramatic move around midday today.
He is expected to say: “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.”
Osborne has already abolished rules that forced most Britons to use their defined contribution pension savings to buy an annuity.
Mark Wood, chief executive officer of JLT Employee Benefits, said: “Today’s announcement from the chancellor that the 55% on pension pots on death will be abolished is a very positive move.
”First and foremost, it is fundamentally fair in that a greater proportion of an individual’s wealth can be passed on to beneficiaries, avoiding what is effectively an extension of inheritance tax at a higher rate. The move should encourage people to save for their retirement, cementing as it does the idea that retirement funds remain ’my money’.”
This is a positive step, which makes saving for retirement more attractive. It will encourage people to save more by removing the fear that their dependants will not have access to their savings.
This announcement is a logical extension to the Budget reforms, and is a move that we called for. We are pleased that the Government has listened by giving pension savers more freedom in how their legacy can be used by future generations.
Pension flexibility’ would appear to be the mantra of this Government and we are extremely pleased to see that the Chancellor has built on the pension freedoms announced in March with the scrapping of the 55% pension tax on death. This high tax rate was recognised as unfair at the time the new freedoms were announced and the Government said it would consult on how it should be changed. Clearly the Government has been true to its word and this is most welcome.
“We now have clarity and fairness for funds remaining in pension plans after on death. While today’s announcement is likely to impact on the annuity providers in the short term, it should make it more attractive for savers who have started to draw down, to leave retirement savings in their pension plans only drawing them when needed – safe in the knowledge that unused funds on death will not be taxed at the punitive rate of 55%.
Today’s announcement is an eye-catching addition that is a natural follow on to the freedom and choice initiative mapped out by the Chancellor in his March 2014 Budget. While it may encourage some people to save more into their pension, assured they will be able to pass on the lion’s share without tax, the reality is that this is likely to affect only people with larger pension pots.
What will affect millions of people is the Guidance Service which they will need to help them make good decisions when planning their retirement income. Beyond today’s announcement the focus must be on making sure the Guidance Service is in place ahead of these changes coming into force next year. The proof of all these reforms will be in their implementation and how they affect savers and voters. With less than 140 working days until the service must be up and running, the clock is ticking.
The Government also needs to keep hold of its promises about the annuity market, which the majority of savers are likely to still depend on for some of their retirement income. They should accelerate the review of the annuity market to ensure it is working well and can provide savers with products that offer good value.
Today’s announcement from The Chancellor that the 55 per cent tax on pension pots on death will be abolished is a very positive move. First and foremost, it is fundamentally fair in that a greater proportion of an individual’s wealth can be passed on to beneficiaries, avoiding what is effectively an extension of inheritance tax at a higher rate. The move should encourage people to save for their retirement, cementing as it does the idea that retirement funds remain “my money”.
Today’s fantastic news means pensions are now truly effective for income and inheritance tax planning. It creates a genuine incentive to save, knowing your loved ones can benefit too, helping older family members support younger generations who find it harder to save. The savings revolution, which began in March and continues with today’s announcement, now places pensions firmly centre stage.
The proposed abolition of this hefty 55% tax charge on a newly deceased person’s unused pension funds is extremely good news and will surely be widely welcomed. The present rules have never made much sense hitting all people past 75 and most others under that age who have already accessed their funds perhaps by taking part or all of the tax free lump sum and/or having started an income drawdown plan.
It is right and proper that savers can feel assured that money they have voluntarily put away in a pension plan over many years and which they have not fully used should pass on to their loved ones on their death without some exorbitant tax charge being levied on it by the government.
It is also probably necessary to take account of the major changes to pensions coming into force next April which will allow many savers full and unfettered access to their pension funds from age 55. If the 55% tax charge were to be retained beyond that date it might well encourage individuals to draw down their funds too quickly with a view to avoiding the possibility of having to incur this tax on their unused money. This could mean they run out of money and leave themselves short in their later years.
In an ideal world all tax charges on pension funds inherited on death would be abolished without a distinction between those aged under and over 75, or at least would only apply where the death occurred at a later age than 75 (Given that people’s life expectancy continues to rise could 80 be the new 75?). Under the circumstances, however, the Chancellor has probably gone further than many in the pensions industry expected and is to be commended for making the changes he has now announced.
These changes will encourage savers to keep their pension savings within the pensions tax environment. When the reforms take force in April next year there will be greater demand for annuities that allow any remaining pension savings to be passed to loved ones when the customer dies, a feature that is already available. We are working with HM Treasury to ensure fair treatment for those who have already purchased annuities with these guarantees.
Independent research continues to show that at retirement the majority of customers want a replacement for their wages in the form of a guaranteed income. The changes announced today make annuities even more attractive – not only are they the only solution to provide a guaranteed income for life but now unused pension savings can be passed on free of tax.
The abolition of the ‘Death Tax’ is great news for pension savers. It creates an additional incentive to save into a pension knowing that beneficiaries will not incur a punitive tax. Beneficiaries are able to take all the pension cash without any tax charge from April 2015, if an individual dies aged below 75, and for those who die aged 75 or over beneficiaries will only pay their marginal tax rate on drawdowns. Given these changes, and those changes announced in the Budget, many more people may benefit from income drawdown and need expert guidance and advice.