Govt scraps 45% tax on dependants drawdown

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A rule that forced dependants to take inherited pension funds as a lump sum at 23 has been scrapped by the Government.

The Budget documents reveal technical changes that mean dependants’ flexi-access drawdown accounts get converted into nominees’ accounts.

As a result they will no longer have to take any remaining funds as a lump sum and suffer a 45 per cent tax hit.

Nominees and adult dependants can withdraw savings as quickly or slowly as they like but until now child dependants, where the deceased died over age 75, they had to 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.

Retirement Advantage pensions technical director Andrew Tully says: “This change allows them to keep money in the pension wrapper until they actually need it, and helps people cascade pension wealth down through the generations in a tax-efficient way.”

AJ Bell head of technical resources Gareth James says: “It is helpful that the Government has corrected one of the anomalies that arose from the introduction of the changes to the taxation of death benefits.

“This will be helpful where children receive death benefits as it won’t encourage accelerated withdrawal from the pension scheme before age 23.”