New pension changes keep on coming!

1 October 2014

The Chancellor, George Osborne, has announced further changes to the future of pensions, which will take effect from April 2015, having a dramatic effect on the retirement planning landscape.

From then a pension fund could become a new tax-efficient savings vehicle, something that will particularly appeal to those with large savings.

Not only that, it will be possible to pass the pension pot from one generation to another, far more tax efficiently than n the past and with greater flexibility.

Who will benefit?

Anyone who has a defined contribution pension - where their contributions build up in a pot, which is then used to buy a retirement income.  Many people people already use them to provide an income - so-called "pension drawdown".

How will the changes affect those who die before the age of 75?

Currently, if a pension fund has not been used to provide an income, there is no tax payable.  However, anyone who inherits a pension fund that is already being used to provide an income, has to pay 55% in tax if they receive a lump sum. From April 2015, anyone who inherits a pension fund will have no tax to pay - whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25m on the amount of money anyone can put into a pension in total.

How will the changes affect those who die after the age of 75?

Currently anyone who inherits an unused pension pot from someone older than 75 has to pay tax at 55%, with the exception of spouses who can inherit the pension and pay income tax on the income they receive.

From April 2015, all beneficiaries will only have to pay income tax. Depending on the rate of tax they pay - their marginal rate - they will have to pass 20% or 40% to the taxman.

Can I use a pension to avoid inheritance tax?

Up to the age of 75, passing on a pension will carry no tax liability.  Other assets, like money in ISAs, shares or savings accounts - will be liable for Inheritance Tax (IHT). Currently passing on anything worth more than £325,000 to your beneficiaries is taxed at 40%.

Beyond the age of 75, it is likely that most inheritors would only pay 20% income tax on the money they receive from a pension fund - far less than under IHT.

So it might make sense for pensioners to put as much as they can into a pension fund, although there is currently a lifetime limit of £1.25m.

What will the impact be on final salary schemes?

The new freedom to pass on pension pots won’t apply to final salary schemes and, as a consequence, they might appear less attractive. When a member of a final salary scheme dies, the pension dies too, and can usually only be inherited, in part, by a spouse or civil partner.


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