The inter-generational pension plan

1st December 2014

The government has amended the Taxation of Pensions Bill, paving the way for inheritable pensions.

At the end of September the Chancellor surprised many people by announcing at the Conservative Party conference new rules for treatment of money purchase death benefits from April 2016. Among those caught on the hop was the Treasury, which issued a rushed press release that was widely criticised as confusing matters further.

In mid-October the government introduced the Taxation of Pensions Bill to parliament, but this made fewer changes to death benefits than had been suggested by Mr Osborne and the Treasury. The missing detail emerged in early November with a raft of amendments tabled by David Gauke, Financial Secretary to the Treasury. The main effect of these for money purchase pension schemes is that from 6 April 2015:

  • On death before age 75:

   -  There will normally be no tax charge on any lump sum payment, whether or not an income was being

   -  Alternatively any unused or drawdown fund remaining on death may be used to provide tax-free flexi-
       access drawdown income for any dependant(s) or nominee(s) of the deceased.

  • If death occurs on or after age 75:

   -  There will generally be a flat 45% tax charge on any lump sum payment;

   -  Alternatively the fund remaining on death may be used to provide taxable flexi-access drawdown
      income for any dependant(s) or nominee(s) of the deceased.

  • On the death of a flexi-access drawdown recipient, be it a dependant or nominee, the options (and tax treatment) are the same for passing on the residual fund to the recipient’s nominee(s).
  • The same tax rules will apply thereafter to all successive beneficiaries as the fund moves down through generations, until it is paid out as a lump sum or exhausted by withdrawals.

The consequences of these changes are still being thought through and you should not consider taking any action until the legislation is finalised. However, it does already appear that the estate planning role of pensions is set to increase further and your existing pension death benefit strategies may need to be reviewed.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The Financial Conduct Authority does not regulate tax and trust advice.

Related Articles

Making a Will during COVID-19

Thinking about how well we are prepared for our futures As coronavirus (COVID-19) leaves many of us working from home surrounded by our families and loved ones, it is inevitable that we start to think about how well we are prepared for our futures.

Read more

Bank of Mum and Dad

Make sure you can afford it and understand any tax implications Parents have always supported their children in lots of different ways. These days, growing numbers of parents see their adult children struggling to build up enough in savings to put down the deposit on a house or to afford to move up from a first home to something larger – but does this mean parents should help financially?

Read more

Festive Financial Gifts

Deciding on the right investments for the children in your life As the festive season approaches, have you thought about gifting your children or grandchildren something different this Christmas? Giving them a good start in life by making investments into their future can make all the difference in today’s more complex world.

Read more