Chancellor Abolishes 55% UK Pension Death Tax

29 September, 2014

At today’s Conservative Party Conference, the UK Chancellor made a surprise announcement that from April 2015 the UK’s 55% pension death tax will be abolished.

Currently, in the UK , a 55% tax charge is applied if a person is already receiving a pension from a defined contribution or personal pension via income drawdown and passes it on to a beneficiary who takes the remaining pension as a lump sum payment. As a result, if a spouse is the beneficiary, he or she would typically continue to draw the pension as opposed to taking a lump sum payment to avoid the 55% tax. However, if a pension is left to someone other than a spouse or dependent, like a non-dependent child, that pension would be paid out as a lump sum and be subject to the 55% tax. In addition, if a person has not drawn from their pension and is 75 or older, the 55% tax applies.

As part of the revolutionary pension changes proposed by the UK Government earlier this year (see Response to Flexible Pension Consultation), it was expected that a reduction in the 55% tax would be announced in December as part of the Autumn statement. Many in the industry had expected a reduction from 55% to around 40%. As a result, today’s announcement has caught many by surprise. While the devil could well be in the detail, headline points set-out by the Chancellor today include:

If you are under 75 years old

From April 2015, individuals receiving their pension via income drawdown or have not yet taken a pension can on their death pass on their defined contribution or personal pension to anyone as a lump sum free of UK tax.

The person receiving the money will pay no UK tax when they withdraw monies from that pension whether as a single lump sum or via drawdown.

If you are over age 75 years old

From April 2015, individuals receiving their pension via income drawdown or have not yet taken a pension can on their death pass on their defined contribution or personal pension to anyone and that beneficiary can access the pension funds flexibly at any age (subject to applicable income tax). There are no restrictions on how much of the fund the beneficiary can withdraw at any one time. However, if the beneficiary wishes to take the pension as a single lump sum payment this would be subject to a 45% tax charge.

The above changes will only apply to defined contribution and personal pensions, not to those who take an annuity or have a final salary pension. It is felt by many in the industry that this will make annuities even less appealing for people entering retirement. In addition, for those in final salary schemes, it may make them think twice before drawing their pension. By way of example, a final salary scheme providing a pension of £10,000 per year could translate into a personal pension pot of £200,000. While a final salary scheme offers guaranteed benefits, if a person does not have a spouse or is in ill health, transferring their pension to a personal pension would enable them to protect and pass on a significant sum to a beneficiary when the pension would otherwise be lost.

Photo Credit: “Scrabble Series Taxes” is copyright (c) 2012 Chris Potter and made available under CC BY 2.0