CHANCELLOR George Osborne surprised everyone at the recent Conservative conference by his pre-election promise to cut death benefit tax.
The Chancellor used the conference to announce that the death benefit tax charge on lump sum pension payments will be scrapped altogether with effect from April 2015. The surprise element was the timing, as in the March Budget, he said that it would be reviewed and I think the industry was expecting the details to be included in the Autumn Statement later this year.
However, this is largely good news for anyone with a UK personal or defined contribution pension scheme, whether it is in payment now or not yet commenced.
Under current rules, when a person dies either after the age of seventy five, or if they have commenced their pension benefits, at any age, their residual pension fund can be paid to any beneficiary but 55% tax will be deducted at source. This is regardless of the tax position or even tax residency of the pension holder or the beneficiary.
With effect from April 2015, whether benefits have been commenced or not, when a person dies before the age of seventy five, any beneficiary can receive the pension fund value and this will not be taxed. However, when a person dies after the age of seventy five, until April 2016, a reduced 45% tax charge is to apply to any lump sum payment and thereafter, marginal rate income tax will be payable, with the amount depending on the overall tax position of the beneficiary.
These rules apply to all UK tax resident people but for those who are expats, the lump sum taxes will still apply but it is unclear how the marginal rate taxes will be applied and where the beneficiary is non-UK resident, perhaps it will only be the tax regime in their country of residence that will apply.
We will also still have to wait for the Autumn Statement to find out exactly how the new rules will affect people who move their UK pension fund into a QROPS (Qualifying Recognised Overseas Pension Scheme). For those who have been non-UK resident for more than five years, they automatically escape the punitive tax changes on death and for those over the age of seventy five, a QROPS may well continue to be the best option.
Even with the relaxation of the rules, there will remain some small advantages to moving their UK pension fund into QROPS, even if they have no intention of moving overseas, but that is another subject altogether.
With the much greater flexibility in terms of how and when pension funds can be used applying from next year and the revisions to the death benefit tax, this will bring a level of complexity. But it will herald a new era in terms of financial planning opportunities in retirement which has to be good news.