- On death before age 75, any pension death benefit will be paid tax-free within the Lifetime Allowance (LTA). In a change from the original proposals, this will now apply to survivors’ annuities and pension guarantee payments as well as inherited drawdown pots.
- On death at age 75+, pension death benefits will be taxed as the recipient’s income, when they draw the funds. For 2015/16 only, pension drawdown lump sums will be taxed at a flat rate of 45% – but income tax will apply to all post-age 75 pension death benefits from 2016/17 onwards.
- The old tax distinction between crystallised and uncrystallised pension pots is to be abolished. Within the LTA, the key to the pension tax treatment will be the deceased’s age at death.
- Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the pension drawdown arrangement and decide when, or if, to draw down on it.
Our Comments on the Private Pension Reforms
In our view, these changes transform the role of pensions in wealth transfer planning. This places flexible pensions at the heart of estate planning, opening up exciting new advice opportunities.
As widely expected, those accessing the new pension freedoms will pay the price of a reduced £10k ‘money purchase’ Annual Allowance and no future carry forward.
- This sends a clear message to maximise pension funding before accessing the new pension flexibility.
- The exemptions for existing pension capped drawdown clients, and those only drawing tax-free cash after April 2015 shows the importance of pensions advice to navigate this tax minefield to keep pension options open.
Other Pension Announcements
- State pensions: The new single-tier State pension from April 2016 will be at least £151.25, with the final figure to be confirmed next Autumn. Meantime, the Basic State pension will be increased by 2.5% (to £115.95 for a single person) from April 2015 under the ‘triple-lock’ guarantee.
- Age 75: Following informal consultation, there will be no change to the 75 upper age limit for tax relief on pension contributions by individuals.
- Means-testing: Fears that the new pension flexibility could lead to a lifetime’s pension savings being deemed immediately available in means-testing assessments have been quashed. Assessments will be based on the annuity income the pot could provide, with higher income only being assessed if it’s actually taken from the pension arrangement.
This commentary is our understanding of the Autumn Statement on 3 December 2014. It is for general information only and does not constitute advice. If you would like advice on pension planning, please do not hesitate to get in touch with us on 01392 875500 or info@SeabrookClark.co.uk