Osborne to cut pensions ‘death tax’
The government is to abolish the 55% pensions death tax charge, Chancellor George Osborne will announce later today.
The measure will come into force in April 2015 alongside the pension reforms outlined in the Budget.
The new rules mean that if a person who dies is 75 or over, beneficiaries will only pay tax at their marginal income tax rate on drawdowns from the pension.
When an individual under the age of 75 dies they will be able to give their pension pot to any beneficiary tax free, including if the pension is already in drawdown. There will be no tax when the pension is passed on, and the beneficiary will not have to pay income tax on the money they withdraw from the pension.
Beneficiaries will be able to access pension funds at any age and the lifetime allowance, currently £1.25 million, will still apply.
Although the new rules come into force in April 2015, beneficiaries of anyone who dies before that date can still benefit so long as payment is delayed until after that point.
George Osborne is expected to tell the conference: ‘People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free.
‘The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down.
‘Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free. Not a promise for the next Conservative government but put in place by Conservatives in government now.’
Under the existing rules, anyone who dies over age 75 can only pass on their pension fund tax free to a spouse or dependent under 23 years of age.
If a person dies before age 75, they can only pass on pensions tax free if untouched.
If they have taken out tax free cash and the fund is in drawdown, then the 55% tax is still charged.
Osborne was originally meant to set out plans for a reduced pensions death tax in December’s Autumn Statement.
The announcement has been brought forward to the Conservative party conference as the Tories look to gain some positive headlines following a second defection to Ukip and a minister resigning over a tabloid scandal.
Osborne had been tipped to reduce the charge to 40%, but in scrapping it completely has gone further than anticipated.
The move is expected to cost the Treasury around £150 million per year and affect around 320,000 people.