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Treasury hits back over ‘death tax’ annuity criticism

The Treasury has revealed further details of proposals to abolish the 55 per cent pensions “death tax” and hit back at suggestions the reforms could wound annuity providers.

A document circulated to the industry by the Treasury, seen by Money Marketing, confirms that from April 2015 the following lump sum death benefits will be tax-free where the individual dies before age 75:

  • pension protection lump sum death benefit
  • annuity protection lump sum death benefit
  • drawdown pension lump sum death benefit
  • uncrystallised funds lump sum death benefit

Beneficiaries of people who died before the announcement on 29 September will be able to ask their scheme administrator to delay the payments if they want to take advantage of the new rules.

New pension tax system

However, tax-free lump sum payments must be made within two years of the scheme administrator being notified of the death of the individual.

The Treasury also confirms the new tax arrangements will apply to defined benefit arrangements.

Policymakers have faced criticism from some in the industry for choosing to create a tax regime which favours drawdown over annuities.

The Treasury document says: “Payment of dependants’ annuity from joint life annuities will, as now, be taxed at the recipient’s marginal rate, regardless of the age of the member when they died. There is also no change on the rules on who may receive a dependant’s annuity.

“The Government is clear that annuities will remain the right choice for many at some point during their retirement, and believes that many people will still value the security of an annuity.”

The document goes on to list measures the Government is introducing to make annuities more attractive, including allowing annuities to decrease.

MGM Advantage pensions technical director Andrew Tully says: “This confirms the Treasury was caught on the hop by Osborne’s announcement because this is the kind of detail you would expect to be published straight away.

“The industry now has a bit more clarity on how this system will operate.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Incompetent Regulators 1st October 2014 at 4:21 pm

    Below 75 crystallised can be passed onto beneficiary as lump sum tax free!!!!

    Is that right?

  2. @I R. Yes. There does seem to be an even bigger flaw in there……. It specifies that uncrystallised funds will be tested against LA before being paid “as a lump sum”. Inference then that the current position (fund not tested if used to provide dependant’s income) continues. Therefore – no LA test, and no income tax on the flexi-access dependant’s income which could then be taken immediately. Versus LA test if taken as a lump sum. Doesn’t stack up.

  3. I think by ‘tax free’ they must mean IHT free

  4. @Derek – I think the mistake is using the word “think” when referring to successive gov’t and their continual changes to pensions which are accelerating 🙂 . Probably best to let the dust settle before trying to get our heads round the changes and explaining said changes to clients.

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