Child dependants excluded from pension death tax reforms

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Rules that mean child dependants must spend pensions before the age of 23 should be scrapped to avoid potentially huge tax bills, AJ Bell says.

A dependant’s pension usually stops when the child reaches 23, while if the beneficiary was 24 when the payments began they are treated as a nominee.

Nominees and adult dependants can withdraw savings as quickly or slowly as they like but for child dependants, where the deceased died over age 75, they must take the entire pension pot by 23.

Withdrawals are taxed at the dependant’s marginal rate of income tax, meaning they could pay more tax than is necessary.

Under the new death benefit rules, if the death occurs before the age of 75 savings are passed on tax free.

AJ Bell technical resources consultant Charlene Edwards says dependants’ pensions for children “seem to have been excluded from this new flexibility”.

She says: “The new death benefit rules for defined contribution arrangements have provided wider planning opportunities for advisers and savers to draw income as and when they require it.”

She adds: “The rules for all beneficiaries could easily be aligned so that when they reach age 23, a dependant child could also make use of them.

“Is the fact the dependant’s pension has to stop at 23, whereas a nominee’s pension for a 24 year old is not restricted, an unintended consequence of rushed legislation or will it remain as a penalty on young people who must withdraw funds in such a potentially short timeframe?

“We would ask the Government to remove this anomaly in the rules as soon as possible so that on attaining age 23, dependant children can choose to leave the funds in a tax-advantaged wrapper until the point they actually need to access them.”

Last year the Government scrapped the ‘death tax’ on pensions in drawdown, value-protected annuities and joint-life annuities where the member dies before the age of 75.

If the member dies over the age of 75, beneficiaries are normally taxed at their marginal rate of income tax.