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Passing on a pension when you die: Changes from April 2015

At the moment, it is usually only possible to pass a pension on as a tax-free lump sum if you die before age 75 and have not taken any tax-free cash or income. Otherwise, under income drawdown rules, any lump sum paid from the fund after death is subject to a 55% tax charge.

This will change from April 2015, with the 55% ‘death tax’ being abolished. The tax treatment of any pension you pass on will depend on your age at death and the options chosen for your pension.

Even if you die before April 2015, your beneficiaries can still take advantage of the new rules if they wait until April 2015 to take benefits.

Tax charges under income drawdown from April 2015

If you die before age 75:

  • Your pension can be passed on tax-free as a lump sum
  • Your beneficiaries can draw an income from it tax-free via an annuity or income drawdown

If you die after age 75:

  • Pass on the entire pension fund as cash in one go, subject to 45% tax. It has however been proposed that this should be changed to their marginal rate of Income Tax from 2016/17
  • When passing it on as income, it is subject to Income Tax at your beneficiary’s marginal rate

Tax charges if you have purchased an annuity from April 2015

If you die before age 75:

  • Your pension can be passed on tax-free as a lump sum (if you have chosen value protection) or as income (if you have a joint life or guaranteed annuity)

If you die after age 75:

  • Pass on the entire pension fund as cash in one go (if you have chosen value protection), subject to 45% tax. It has however been proposed that this should be changed to their marginal rate of Income Tax from 2016/17
  • Pass your pension on as income if you have a joint life or guaranteed annuity, taxable at your beneficiary’s marginal rate of Income Tax

If you have opted for a single life annuity, which is suited to people who don’t have a husband, wife, partner or any other dependant, your pension will be lost.

 

This summary is based on our current understanding of the new pension rules and changes, as recently announced. Information is being released quickly and this summary can’t cover every facet.

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