Chancellor George Osborne has announced further pension reforms that will allow savers to leave more of their money to beneficiaries.
The latest changes were unveiled by the Chancellor as part of his speech at the Conservative party conference in Birmingham.
He said in relation to the changes: ‘People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax-free.’
The 55% tax rate to go
People receiving money from a ‘passed on’ pension pot will no longer be subjected to a 55% tax hit that has previously substantially diminished the inherited pension savings of loved ones.
The change will remove the 55% tax that is charged on untouched, or ‘uncrystallised’, defined contribution pension funds left by savers aged 75 or over, and on pensions from which income has already been taken (irrespective of your age). For more, see our guide on your income options at retirement.
Under the new proposed rules those inheriting pension savings will at worst only pay their marginal rate of income tax (20%, 40% or 45%), or no tax at all, as is the case now, if the deceased is under 75 and the pension pot hasn’t been touched (or ‘crystallised’).
Spouses and financially dependent children under the age of 23 are already exempt from the 55% tax.
It’s worth noting that if someone has bought an annuity with their pension savings, they won’t be able to pass this on to their family after they die. This is because annuity providers keep any remaining funds not paid out after an annuity-holder dies.
Latest pension proposal and what it means
The latest announcement is set to be the last step in the raft of changes to the pension system – see the Which? comprehensive guide on all the pension changes.
It provides pension savers with the flexibility to access their funds from the age of 55, the facility to keep their money invested while taking enough out to live on and the ability to eventually pass on funds to their family, without the previously high tax bill.
Income drawdown schemes are likely to become a more popular option, at the expense of traditional annuities, as savers look to spread out taking income over their retirement, but also take lump sums when needed.
Some retirees will still favour the certainty of an annuity and the fact that it will provide an income for however long you live. Changes to the tax rules announced in July 2014 will, however, give annuity providers scope to make their products more flexible.