If it had escaped anyone’s consciousness that there is a general election due in May 2015, then George Osborne will remind us today by unveiling what may be the first of a number of tax easements over the next seven months.
This news is not a total surprise. We had already been told that the Chancellor was minded to reduce the 55% tax applied to lump sum death benefits released from certain pension arrangements. Although the details are yet to be confirmed by H M Treasury or HMRC it appears as if the general decision may be:-
- The 55% charge levied on pension death benefit lump sums for those over 75 or who have released benefits will go.
- Instead, the recipients of these lump sums will pay tax at their highest marginal rate. In other words the payment would be treated as taxable income in their hands.
- An option may exist to transfer the deceased’s pension pot to the pension of the next generation.
It appears as if this move will cost the Government £150 million and affect 320,000 people. It follows the relaxation of pension rules made earlier in the year that will allow:
- Individuals over age 55, with “Defined Contribution” pension pots to release all of their pot rather than to receive the benefits as income.
- When individuals release their pot in this way then, generally, 25% of the pot would be tax free and 75% would be treated as taxable income. This taxable income would be added to other income and taxed at 20%, 40% or 45% depending upon how much taxable income the individual has.
How Will This Change Individuals’ Plans?
Up until now many people with larger “Defined Contribution” pension pots have been encouraged to drawdown on their fund, especially after age 75, in the knowledge that anything left behind would face the 55% charge.
It is possible that these people who enjoy financial security without relying upon their pension pot may now delay releasing benefits or reduce the amount of benefit they receive. They will now see an opportunity of passing wealth to the next generation with a tax bill that could fall anywhere between 0% and 45% (although likely to be nearer the latter for this group of people). As these funds have already enjoyed tax relief this appears to be a favourable option.
For a much larger section of society this announcement adds momentum to the increasing allure of pensions saving relative to other areas.