The Chancellor today announced that from April 2015 individuals will have the freedom to pass on their unused defined contribution pension to any nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies to pensions passed on at death.
Around 320,000 people retire each year with defined contribution pension savings; these people will no longer have to worry about their pension savings being taxed at 55% on death. From next year, individuals with a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to pass their pension to if they die.
Julie Hutchison, Head of Customer Affairs, Standard Life, said:
“Today’s fantastic news means pensions are now truly effective for income and inheritance tax planning. It creates a genuine incentive to save, knowing your loved ones can benefit too, helping older family members support younger generations who find it harder to save. The savings revolution, which began in March and continues with today’s announcement, now places pensions firmly centre stage.”
John Fox, director of the pension provider Liberty SIPP, comments:
"Even the most charitable observer couldn't fail to find the timing a touch fishy. The announcement had been due to remain under wraps until December, but after the Tories' tempestuous weekend, the Chancellor has clearly decided to generate some positive headlines for the party conference.
"But such a such a sizeable tax giveaway - potentially impacting 320,000 people in the party's core middle class constituency - is much more than a quick headline-grabber. It is the final stage of a set of pensions reforms that together are nothing short of revolutionary. The pension industry is steadily being reborn - forced to develop new products and jettison years of hidebound complacency - and savers are changing the way they see pensions. The combination of the freedom to do what they want with their pension pots - and the reassurance that anything they don't spend in retirement can be passed on to their loved ones - will encourage more to save harder.
"It could also deliver the coup de grace to the annuities industry, which has been on the ropes since the new freedoms were first announced in the Budget. The abolition of the pernicious 55% 'recovery charge' on unspent pension pots will make many more people look at alternatives to the annuity orthodoxy - such as drawing down their pension savings gradually.
"At a stroke today's announcement will also torpedo many of the offshore schemes which have sprung up to get round the current tax rules. So even when the headlines have long since faded, the impact will remain. More pension money will be kept onshore, and Britain will have one of the most heavily incentivised pension systems in the world. The pensions industry must continue to respond by offering people simple, attractive products that allow them to make full use of their new freedoms. If that doesn't get more people saving for their retirement, it's hard to know what will."
