It was expected that in the Autumn Statement on 3rd December 2014 the Chancellor, George Osborne would announce changes to the taxation of pension funds when the pension fund holder dies – in other words ‘inherited pension pots’. However he decided to make it the main announcement of his speech at the Tory Party conference in September.

While the changes are most welcome, we needed to take a little bit of time to make sure we fully understood what he was saying. He had previously announced that people would no longer be compelled to buy an annuity, but for most pension policy holders that had been the case for many years. Likewise he had now stated that he has removed the tax on inherited pension pots, again this isn’t quite the whole picture as it is currently possible to inherit a pot without paying tax. The major -  and most welcome change - is that the fund can now be taken as a lump sum without tax – if the person who died was aged under 75. If they were 75 or over then there will still be some tax to pay.  

These changes do not apply to people who have purchased an annuity.

Currently customers who die while they hold a personal pension contract, an income drawdown contract or any other pension contract where there is an actively managed fund, can pass their pension fund onto their partner, family or estate. The person receiving the fund will have two options.

Firstly they can take the pension fund and invest it in a pension contract in their own name. If they choose to do this, then they will receive the fund in full, with no deductions. However if they choose to take it all as a lump sum then tax will be taken from the fund at a rate of 55%. This means that somebody inheriting a pension fund of £50,000 who wanted to take it as a lump sum would only receive £22,500. This 55% tax is being completely removed.

From 6th April 2014 anybody who receives a pension fund from a deceased person who was under the age of 75 can take that fund in full as a tax free lump sum. A massive change.

If the person who held the pension fund was aged 75 or over then the person receiving the fund will pay tax. If they inherit the fund during the tax year 2015 - 2016, and want it as a lump sum they will pay a flat rate of tax of 45%. From tax year 2016 – 2017 onwards people receiving a fund from somebody aged 75 or over will pay tax at their marginal rate. This means that if they had very little other income they could pay no tax, or at the starting rate of 10%. In all cases the maximum that could be paid in tax (based on current tax rates) would be 45%. 

These changes only apply to people who want to inherit a pension fund as a lump sum. People who want to use the fund to provide themselves with a pension income will continue to pay income tax on the money they take at their marginal rate.

In a little over 6 months the Chancellor has made some dramatic changes to drawdown pension funds which will have a major impact on how customers use them. For more information on how you can use income drawdown either call us on 020 33 55 4827 or use the buttons on the panel on the right hand side of this page to obtain more information.