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Osborne to cut 55% pensions ‘death tax’

Chancellor George Osborne is abolishing the 55 per cent inheritance tax that applies to defined contribution pension pots left by those aged 75 or over, and to pensions in drawdown. 

The BBC reports that in his speech to the annual Conservative party conference in Birmingham today, Osborne will say that when the deceased is 75 or over, beneficiaries will only have to pay their marginal income tax rate at the point they take money out of the pension.

Access to pension pots of those who die under 75 will be tax-free, including if the pension is in drawdown.

The changes will come into effect next April.

The Treasury, which has been reviewing the tax since the Budget, estimates it will cost £150m a year and affect 320,000 people – meaning a tax windfall of almost £500 per person. The Autumn Statement will set out how the policy is being funded.

Osborne will 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. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax-free.”

Hargreaves Lansdown head of pensions research Tom McPhail says the changes will make annuities even less attractive and coudl boost funding of long-term care.

He says: “These changes to the tax rules will be a mixed blessing. They will encourage investors to take the maximum possible advantage of their pension contribution allowances, which is certainly a good thing.

”Investors can build up their pension fund, secure in the knowledge that they can not only draw on their savings without restriction from age 55 but in addition, any unused savings can be passed on to their inheritors tax-free on death.”


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. ”People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax-free.

    So another smoke and mirrors announcement – income tax will still be payable and is likely that, as people are likely to take it as a lump sum rather than purchase an annuity, there will be an income tax windfall for the Treasury.

  2. Sean: I know it’s hard to resist having a pop at the Government but I don’t see how this is smoke and mirrors. No matter how you take it out it’s a tax saving because income tax is never higher than 55%. (Except the 60% rate above £100,000, but it would take a very specific set of circumstances – and poor planning – for that to result in a higher tax bill on inheriting a pension fund than the current 55%.) In fact if you are unfortunate to die before 75 with a fund in drawdown the tax is going from 55% to zero.

    And I don’t see how it can provide the government with a tax windfall. Entirely the opposite. Before if someone died with a drawdown fund and no dependants, it was an immediate 55% windfall for the Treasury. Now it will be at best (for them) a 40/45% windfall, and it will be far more likely that people will draw it out in bits to remain a 20% taxpayer, so they will get less money more slowly.

  3. On the face of it, welcome news; offering even more choice and flexibility in addition to the current proposals whilst also reducing tax liabilities.

    Maybe the tide is turning and soon the majority will ‘want’ a pension rather than feeling they ‘need’ one!

  4. It is my understanding that any part of your pension pot that is not in drawdown can be passed on free of tax (including income tax charges to the recipient) provided you die before the age of 75. Will this continue to be the case I wonder?

  5. I am completely fed up with the Osborne “Rabbit Out of the Hat” tricks which are mostly con tricks. Death tax on pensions hasn’t been abolished merely reduced. Anyway when you consider what a pension is for – how many will actually have anything left over worth having if they live past their 80’s (assuming they retire in their late 60’s)? Annuities may be unpopular but they are a nil risk option guaranteed to pay out as long as you live (and if you are wise and take out a joint life annuity with your spouse– then as long as the longest lived survives). Many if not most wrinklies may also qualify for an enhanced or impaired life annuity. Leave it invested and we have a crash like in 2008 and you won’t be laughing at all! Take you pile out now and help the Exchequer gain an early windfall.

  6. Paul McArdie has it right I think. This is very clever and will probably raise more tax WHILST also being fairer and simpler to understand. On death, regardless of drawdown status or age, a pension fund will be inherited free of tax by a beneficiary. When that beneficiary withdraws that money they will be taxed at their marginal rate.

    I’m not a huge Osborne fan but this is genius. Essentially he’s giving people a strong incentive to hold pension funds and use them for income. So if I inherit my Dad’s pension, I can take it all out and pay high tax or I can use it as a pension for me.

    Pension funds that are unused will be passed to the next generation.

  7. Will the devil be in the detail, I wonder ????

  8. A very good step forward. The next ones should be the restoration of Contributions Insurance (WoP) and life cover as an integrated element of a PP.

  9. I cannot understand the negative comments on this move.
    It is something we in the industry have been requesting for several years; it may be illusory to think this had anything to do with it actually happening but let’s take a positive view and welcome it.

  10. I can’t understand the negative comments either, although I agree with Paul Woolley re the detail. This really could bring in the concept that many SIPP firms have been trying to promote, of a true “Family SIPP” The lifetime allowance and reduced annual allowance post crystallisation mean that there will be little opportunity to abuse this facility for the purpose of avoiding inheritance tax. It would therefore be sensible to build up a pension fund that’s close to the lifetime allowance, use it throughout your retirement and then pass on what’s left to the next generation, for them to do the same when they are ready.

  11. Oh this is getting a bit silly. People save in their pensions to provide income in retirement. This sort of thing will be an irrelevance unless those with the pots either decide to spend very little or die early.

    Most will have other assets to hand down and will therefor be able to take income or an annuity to deplete the fund. This will be more IHT effective in the long run.

    This is just the Financial; Services industry slavering at the prospect of more funds under management and a longer lasting fee potential- never mind common sense, logic or what is best for the customer.

  12. Different Point of View 29th September 2014 at 7:35 pm

    The problem is that we as an industry have wanted this, but we need it to be simple and secure so long term planning can be performed, without concerns that a sudden announcement to the party conference can see all your Client’s well laid plan ruined.

  13. Apologies for posting twice on the same thread, which breaks one of my personal rules.

    “This is just the Financial Services industry slavering at the prospect of more funds under management and a longer lasting fee potential- never mind common sense, logic or what is best for the customer.”

    Surely not, Harry. The fact of the matter is that if drawdown is not suitable for a client because of his/her risk profile and the necessity to be exposed to at least a degree of equity investment in most cases, then my advice would still be an annuity and I have no doubt other advisers will concur. We have a bit more to take into account now, that’s all.

  14. @Blair Cann

    I’ll certainly go along with that. It’s just that I’m speaking from my own experience with clients. When they come to take benefits it would seem that their risk profile decreases exponentially. Indeed it is pure text book. As you get older you tend to become less inclined to take risks.

    The question here may be managing greed.

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