DEFINED CONTRIBUTION PENSIONS EXPLAINED
From 6 April 2015, the 55% tax charge will be abolished and individuals under the age of 75 on death can pass their 'defined contribution' pension fund to any nominated beneficiary. The beneficiary will then have the option of either continuing to draw an income (through a flexi access drawdown account) or receive the fund value as a lump sum but crucially, any payments they receive will be tax-free. However, this will not apply to defined benefit (final salary) pension schemes.
If death were to occur post age 75, any individual could still inherit the 'defined contribution' fund and draw an income subject to their marginal rate of tax, but if the lump sum option is selected, this will then incur a tax charge of 45%. However it is intended that from the 2016/17 tax year, the lump sum payment will also be subject to the marginal rate of the individual concerned.
This is a significant change on the current position upon death and will allow individuals to pass on their pension funds more tax efficiently to the next generation.
It will also have implications on wider financial planning strategy. The potential investment horizon for an individual's pension fund will become longer than may have otherwise been the case due to the ultimate tax charge which would have previously applied for those likely to access drawdown.
Those looking to undertake inheritance tax planning may well consider using their pension fund in a manner which was not previously possible, particularly if the ultimate beneficiary of a pension fund will be subject to income tax at a lower rate than that applying to inheritance tax.
As with all changes of this nature, the devil will be in the detail and advice should be sought from a professional.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2015. code: 15/088 exp:31/7/15
