Major changes to the pension rules came into effect on 6 April 2015 which can have considerable benefits for inheritance tax.
Under the previous system, when someone died over the age of 75 without having spent all their pension funds, the money was normally taxed at 55% (unless a spouse or civil partner or dependent child under 23 took an income from it). Only if the pension had never been touched, i.e., neither the 25% tax-free lump sum nor any income from an annuity or “draw-down” plan had been taken, could pensions be inherited tax-free, and only then if the pension owner died before the age of 75.
From 6 April this year, the 55% tax has been scrapped. If the pension saver dies before the age of 75 it can pass tax-free to the beneficiaries regardless of whether or not the pension has been touched. There will be no tax on the transfer of the money to the beneficiary and none to pay when the beneficiary makes withdrawals from the fund.
Where the pension saver is over 75 on death, the 55% tax charge which used to apply has now been replaced by an income tax charge on any money withdrawn from the pension. The amount will be charged at the beneficiary’s top or marginal rate. This provides scope to plan when income is withdrawn to minimise the amount of tax paid, and is a significant improvement to the old rules.
For further information please contact Green & Co.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
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