A Completely Different Type of Family Planning…

At the Conservative party conference this week, George Osborne announced the removal of the 55% tax charge that applies to certain pension death benefits. This is not unexpected. The government already confirmed that unchanged, this tax charge would be too high when the new pension freedoms are introduced from April 2015.

Potentially this means you could pass on more than £1.25 million without paying tax.

A defined contribution, or money purchase, pension scheme can provide you, as an individual scheme member, a pension fund that builds up by making pension savings together with tax relief from the government and investment growth. Your employer may also contribute to your pension savings.

Defined contribution schemes give you an accumulated sum and when you come to retire you can use this fund to provide a pension income. Most company pension schemes are now ‘defined contribution’ schemes.

As announced earlier this week your age at death will still govern how your pension death benefits are treated.

• Death before age 75 – the pension fund can be paid tax free to one or more beneficiaries.

• Death after age 75 – again you have the freedom to pass on your pension fund to one or more nominated beneficiaries. And, where the beneficiary elects to draw income from the fund, this will be subject to tax at the beneficiary’s own marginal rate of income tax. Alternatively, the beneficiary may take the pension fund as a one–off lump sum subject to a 45% tax charge.

The latest measure applies to pension death benefits paid on or after 6 April 2015, even where death occurs before then.

The end of the 55% tax charge is likely to change long –term financial behaviour for some individuals; especially when and how you choose to take pension benefits.

For those who can afford to do so, instead of accessing a pension fund held in a defined contribution scheme to provide an income in retirement, there may now be an incentive to use money accumulated in bank accounts and other investments before dipping into a pension pot.

Pensions are currently seen as a way of saving for retirement, but in the future they could also become an effective inheritance tax planning tool, providing a route to passing on assets in a more tax efficient way following death.

Also, another key change is the removal of the distinction between payments to dependants and those who don’t qualify as dependant, such as adult children over age 23. Prior to the change only lump sums could be made to beneficiaries. To receive a pension following death an individual had to qualify as a dependant. Following this change pension income payments made on or after 6 April 2015 can now be made to any beneficiary.

It is estimated that 12 million Britons have some form of defined contributions pensions saving, although comparatively few will not be reliant on their pension fund savings in retirement.

The government estimates that the scrapping of the 55% rate could benefit around 320,000 people.

To understand how the latest change to pensions could affect you and your family speak to your financial planner or email Sanlam at letstalk@sanlam.co.uk

This article is for information purposes and should not be treated as advice. Individual circumstances should always be considered prior to purchasing any financial products. For further information please contact your Wealth Planner.

Sanlam is a trading name of Sanlam Wealth Planning UK Ltd (Reg. in England 3879955) and English Mutual Ltd (Reg. in England 6685913). English Mutual Ltd is an appointed representative of Sanlam Wealth Planning UK Ltd which is authorised and regulated by the Financial Conduct Authority.