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George Osborne's new rules for passing on a pension | |
(1 day later) | |
The Chancellor George Osborne has announced further changes to the future of pensions, which will take effect from April 2015. | The Chancellor George Osborne has announced further changes to the future of pensions, which will take effect from April 2015. |
Behind them is a shift of emphasis in what a pension is actually for. | Behind them is a shift of emphasis in what a pension is actually for. |
Once a pension existed purely to provide an income in later life. | Once a pension existed purely to provide an income in later life. |
But now - under Mr Osborne's vision - a pension fund could become a new tax-efficient savings vehicle, something that will be particularly attractive to those with large savings. | But now - under Mr Osborne's vision - a pension fund could become a new tax-efficient savings vehicle, something that will be particularly attractive to those with large savings. |
More than that, it will be possible to pass the pension pot on from generation to generation, just like the family silver. | More than that, it will be possible to pass the pension pot on from generation to generation, just like the family silver. |
Who will benefit? | Who will benefit? |
Anyone who has a defined contribution pension - where their contributions build up in a pot, which is then used to buy a retirement income. This includes most auto-enrolment schemes. In the UK roughly 12 million people currently save into such pensions - and, according to the Association of British Insurers (ABI), 400,000 people already use them to provide an income - so-called "pension drawdown". | Anyone who has a defined contribution pension - where their contributions build up in a pot, which is then used to buy a retirement income. This includes most auto-enrolment schemes. In the UK roughly 12 million people currently save into such pensions - and, according to the Association of British Insurers (ABI), 400,000 people already use them to provide an income - so-called "pension drawdown". |
The changes will not affect those on final salary company schemes - or the state pension. | The changes will not affect those on final salary company schemes - or the state pension. |
How will the changes affect those who die before the age of 75? | How will the changes affect those who die before the age of 75? |
Currently, anyone who inherits a pension fund which is already being used to provide an income, has to pay 55% in tax. The only exceptions are spouses or children under 23. Instead, they are required to pay income tax on any income they draw from the fund - at either 20% or 40%. If a pension fund has not been used to provide an income, there is no tax payable. | Currently, anyone who inherits a pension fund which is already being used to provide an income, has to pay 55% in tax. The only exceptions are spouses or children under 23. Instead, they are required to pay income tax on any income they draw from the fund - at either 20% or 40%. If a pension fund has not been used to provide an income, there is no tax payable. |
From April 2015, anyone who inherits a pension fund will have no tax to pay - whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25m on the amount of money anyone can put into a pension in total. | From April 2015, anyone who inherits a pension fund will have no tax to pay - whether it is already being used or not. They will not be liable for income tax either. But there will still be a limit of £1.25m on the amount of money anyone can put into a pension in total. |
How will the changes affect those who die after the age of 75? | How will the changes affect those who die after the age of 75? |
Currently anyone who inherits an unused pension pot from someone older than 75 has to pay tax at 55%. Spouses however can inherit the pension (but no other beneficiaries), and pay income tax on the income they receive. | Currently anyone who inherits an unused pension pot from someone older than 75 has to pay tax at 55%. Spouses however can inherit the pension (but no other beneficiaries), and pay income tax on the income they receive. |
But from April 2015, all beneficiaries will only have to pay income tax. Depending on the rate of tax they pay - their marginal rate - they will have to pass 20% or 40% to the taxman. | But from April 2015, all beneficiaries will only have to pay income tax. Depending on the rate of tax they pay - their marginal rate - they will have to pass 20% or 40% to the taxman. |
How many people have been paying 55% tax? | How many people have been paying 55% tax? |
Until April 2011, anyone over the age of 75 had to buy an annuity. In the three and a half years since then, relatively few people will have paid tax at 55%. But neither the Treasury nor HM Revenue and Customs will say exactly how many. | Until April 2011, anyone over the age of 75 had to buy an annuity. In the three and a half years since then, relatively few people will have paid tax at 55%. But neither the Treasury nor HM Revenue and Customs will say exactly how many. |
What will happen to annuities? | What will happen to annuities? |
Annuities - where a pension pot is used to buy an income for life - will continue to be the only way of guaranteeing a particular level of income. But once an annuity is purchased, it cannot generally be passed on to someone else, other than a spouse, without considerable expense. | Annuities - where a pension pot is used to buy an income for life - will continue to be the only way of guaranteeing a particular level of income. But once an annuity is purchased, it cannot generally be passed on to someone else, other than a spouse, without considerable expense. |
As a result, the new tax rules are likely to make annuities look even less attractive, in comparison to keeping savings in a pension fund. | As a result, the new tax rules are likely to make annuities look even less attractive, in comparison to keeping savings in a pension fund. |
Can I use a pension to avoid inheritance tax? | Can I use a pension to avoid inheritance tax? |
Up to the age of 75, passing on a pension will carry no tax liability - whereas other assets, like money in shares or savings accounts - will be liable for Inheritance Tax (IHT). Currently passing on anything worth more than £325,000 to your beneficiaries is taxed at 40%. | Up to the age of 75, passing on a pension will carry no tax liability - whereas other assets, like money in shares or savings accounts - will be liable for Inheritance Tax (IHT). Currently passing on anything worth more than £325,000 to your beneficiaries is taxed at 40%. |
Even beyond the age of 75, most inheritors would only pay 20% income tax on the money they receive from a pension fund - far less than under IHT. | Even beyond the age of 75, most inheritors would only pay 20% income tax on the money they receive from a pension fund - far less than under IHT. |
So it might make sense for pensioners to put as much as they can into a pension fund, although there is a lifetime limit of £1.25m. | So it might make sense for pensioners to put as much as they can into a pension fund, although there is a lifetime limit of £1.25m. |
What will the impact be on final salary schemes? | What will the impact be on final salary schemes? |
The new freedom to pass on pension pots will make final salary schemes look less attractive. When a worker in a final salary scheme dies, the pension dies too, and can usually only be inherited - in part- by a spouse. | The new freedom to pass on pension pots will make final salary schemes look less attractive. When a worker in a final salary scheme dies, the pension dies too, and can usually only be inherited - in part- by a spouse. |
But some schemes allow members to transfer out. So in exchange for an annual pension of £10,000, a worker can accept an equivalent capital sum - say £300,000. From April 2015, that sum can be passed on to beneficiaries. | But some schemes allow members to transfer out. So in exchange for an annual pension of £10,000, a worker can accept an equivalent capital sum - say £300,000. From April 2015, that sum can be passed on to beneficiaries. |