Under current regulations, if you pass away before you start drawing from your pension, the value of your fund shouldn’t be subject to inheritance tax (IHT) – this is because it’s excluded from your estate. However, a 55% tax charge can apply when transferring your fund as a bequest, and is more likely if you’re over 75 when you pass away.
The 55% tax charge will no longer apply from 6 April 2015. If you pass away before reaching 75, you’ll be able to leave your pension fund to anyone without a tax charge, and the new owner won’t have any tax to pay when they make withdrawals from the fund, as either lump-sums or income drawdowns.
If you pass away aged 75 or over, the new owner of your pension fund will be subject to tax on any income drawdowns they withdraw, and will pay the marginal rate of income tax. There will be no restriction on the amount the person can take from the fund, however if the beneficiary withdraws all of its value as a lump-sum, there will be a tax charge of 45% – this may change from April 2016.
If you buy an annuity with your pension savings before passing away, then your pension’s value can’t be inherited unless the annuity contract offers a lump-sum payment on your death.
These upcoming changes mean we need to re-think the tax planning for older people, so that the option to pass on a significant tax-free pension can be taken into account.
Feel free to get in touch with us – we’ll happily go through your tax planning with you.