Proposals meaning savers who have already started drawing down an inherited pension will not be able to benefit from Chancellor George Osborne’s ‘death tax’ reforms have been branded “unfair”.
Osborne announced the 55 per cent penalty on funds passed on when someone dies before age 75 will be scrapped from April next year during his Conservative party conference speech in September. In these circumstances, the inherited pension will be free of tax.
Where the person who dies is over 75, however, the beneficiary will be able to draw down on the inherited pension at their marginal tax rate. A 45 per cent charge will be levied if it is paid as a lump sum, although this will also move to a marginal rate from 2016/17.
Following discussions with the industry, the Revenue has now confirmed that those who have been designated funds but have yet to start taking them as income will still be able to benefit from the new rules from April 2015.
However, anyone who has already made a withdrawal from an inherited pension will remain under the existing tax regime.
Talbot & Muir head of technical support Claire Trott says: “Those who have needed to take an income before 6 April 2015 from their dependants drawdown will continue to be taxed at their marginal rate.
“However, those that have not needed an income to date will not be taxed at the point they choose to take an income, provided the original member died before age 75.
“This seemed to me to be an unfair inconsistency but HMRC have confirmed this to be the case.”
Old Mutual Wealth pensions technical manager Jon Greer says: “It does come across as unfair to those who are taking drawdown. We don’t think there are huge amounts of people out there in this position, so in all likelihood it wouldn’t be a massive cost to the Treasury to extend the reforms.”