Pension funds to pass tax free to heirs

Frances colour

Chancellor George Osborne has announced changes that will allow pension funds to pass tax free to future generations, proposed to take effect from April 2015.

The changes will only apply to defined contribution pension schemes – where both personal and employer contributions are invested over time to build a future non-guaranteed fund value. Final Salary schemes (e.g. Teachers’ Pension), Annuities and the State Pension are excluded.

At retirement, or the point when an income is required, the plan holder has a number of options. If the pension fund is considerable and/or they have other sources of income, the plan holder may choose to keep their pension fund invested and “draw down” an income according to their needs.

Under plans already announced, also to take effect from April 2015, individuals will have the freedom to “draw down” as much, or as little, income as they want. Potentially withdrawing their entire fund at once, noting however that up to 75% of the value withdrawn will be subject to income tax at their marginal rate.

For those individual’s who do not withdraw their entire fund, and instead, maintain the value over the longer term; the Chancellor announced that the Government would review the tax charge that applies to lump sums payable on death.

Payments for the under 75s

Currently when an individual dies before age 75, having vested their pension fund and commenced a “draw down” of income; any lump sum payment of the residual fund is subject to a 55% tax charge.

The government propose that a lump sum be paid tax-free to any nominated beneficiary. If the beneficiary chose to receive income instead, they will be able to make tax free withdrawals as and when they need it until the fund is fully exhausted.

Payments for the over 75s

Currently when an individual dies at age 75 or older, any lump sum payment of the residual fund is also subject to a 55% tax charge.

The government propose that this tax charge is removed, and instead the beneficiary will be subject to income tax at their marginal rate on any lump sums, or income, withdrawn from the fund.

Professional advice can help individuals identify how to best structure their later life income, with a view to maximising assets that can be passed on to their family. The important thing is to start your financial plan as early as possible.

In connection with your financial affairs you should seek independent legal and financial planning advice. OCM is authorised and regulated by the Financial Conduct Authority. If you would like to discuss your options in more detail, please contact OCM Wealth Management on 0845 338 1971.

As published in November’s Issue of Northampton Business Times.