Brave new pension world; Paul Kelly, partner at Parker Kelly Financial Services, answers questions about the new 2015 pension changes.
What has changed? In short, a lot. Benjamin Franklin's famous quote: 'In this world nothing can be said to be certain, except death and taxes' may not ring as true anymore. The new rules mean that when someone who is 75 or over dies, the person they pass their pension onto will only have to pay their marginal rate of income tax when they draw down from the funds.
They will pay no tax on inheriting the pension.
If someone dies before they reach 75, the person who receives their pension will not have to pay any tax on receiving the pension, or when they draw down from the pension, even if the deceased had already started taking funds from the pension.
How is this different from the current rules? Under the current rules, anyone who dies when they are over 75 can only pass on their pension fund tax-free to a spouse or a dependent under 23 years of age. Otherwise it is taxed at 55%.
Also currently, if a person dies before 75, they can pass on their pension tax-free if they have not yet drawn any money from it. Otherwise it is taxed at 55%.
Why is this happening? The new rules come into force in April 2015 with the pension freedoms outlined in the Budget, which mean all pension savers aged 55 and over will be able to draw down from their pension fund at their marginal rate of income tax.
As part of the Budget changes, the Government had said it would review the pension tax charge on death and originally planned to make an announcement as part of the Autumn Statement.
It was expected that the change would be less significant, such as a reduction of the tax to 40%.
What happens if you inherit a pension before April 2015? Anyone due to inherit a pension will be able to ask the scheme administrator to delay the payments in order to benefit from the changes.
In the event of a drawdown policyholder's death, loved ones will potentially be thousands of pounds better off if they can delay taking payments until new tax rules come into place next April.
There is a small catch though.
Lump sums taken out of pensions inherited from someone over 75 between April 2015 and April 2016 will be taxed at a transitional rate of 45%. From 2016, the lump sums will be taxed at an individual's marginal rate.
The rules are simpler if the individual dies before they turn 75, where both inheritance and withdrawals, including lump sums, are tax free. However, if the person dies before April 2015, the tax-free lump sum payment must be paid to the beneficiary within two years of the scheme administrator being notified of the death of the policyholder.
Does every pension get the same treatment? At first, the Treasury suggested the new regime would only affect defined contribution pots. But, after a small period of confusion, it clarified the lump sum death benefits that would come under the rules: ? Pension protection lump sum death benefit; ? Annuity protection lump sum death benefit; ? Drawdown pension fund lump sum death benefit; ? Defined benefits lump sum death benefit; ? Uncrystallised funds lump sum death benefit.
Is this the final nail in the coffin of annuities? There was talk of 'the second death of annuities' following the announcement; however, annuities with lump sum death benefits, such as value-protected annuities, will benefit from the changes.
It is worth noting that the new tax regime will not suddenly make annuities unsuitable. The rules will mainly benefit affluent retirees. As the average client pot is PS60,000 so, in spite of the changes, annuities will still remain a viable option.
In the new pension world, annuity providers would need to innovate. There will need to be a much more flexible annuity system. We may even need to call annuities something else because it has become a dirty word.
What could be revealed in the Autumn Statement? An increase in tax relief from 20% to 30%, maybe, for pension contributions for non and basic rate taxpayers and, at the same time, a reduction in relief available to higher tax payers.
Watch this space!
Paul Kelly of Parker Kelly Financial Services Liverpool. . Contact Parker Kelly Financial Services, 17 Stanley St, Liverpool, L1 6AA, call 0151 236 7838 or log onto www.parkerkelly.co.uk
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|Publication:||Liverpool Echo (Liverpool, England)|
|Date:||Oct 23, 2014|
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