The proposed changes will mean all inherited pensions will be tax free, except for a marginal rate to be paid if money left by a pension holder over the age of 55 is spent instead of saved in a pension fund.
Single life annuities often cease at death, with any unspent money remaining with the provider, whilst income drawdown remains part of the estate, making it a popular choice for people who want to pass their savings to beneficiaries. The concern has always been balancing how much is spent so enough will be left after the taxman has collected 55%. Today’s announcement means that people have more freedoms with spending drawdown, because the entire remainder will pass to beneficiaries rather than the government.
Abolishing the pension death tax is likely to encourage people to look after their pension funds when the new freedoms come into effect next April. This could alleviate some concerns that retirees will spend it all and be reliant on the state. Receiving a fund can help beneficiaries save for their own retirement with a tax-free pension, or they could pay the marginal tax rate to use the money in other ways, such as a house deposit.
Jamie Smith-Thompson, managing director of Portal Financial, said:
"Under existing rules, even removing a portion of the 25% tax-free cash means a pension will be taxed at 55%. Current pension rules disproportionately benefit the wealthy, as they could live off other savings and investments and then pass the pension on tax-free if they die before the age of 75. The chancellor's proposed changes will allow all defined contribution pension holders to spend their pension without worrying about the taxman taking a large chunk of what's left. Like the March Budget, this is a policy from George Osborne to empower those who have saved their money and create an equal playing field that doesn't unfairly favour the wealthy."
