Sweeping changes to the way people access their defined contribution pension savings are just days away.
From 6 April, pension savers will enjoy much greater flexibility about the way they take their pension pots – including setting up an annuity, withdrawing the whole amount in one go or taking a series of lump sums – they also have implications for estate and inheritance tax planning.
One of the reforms affects tax levied on defined contribution funds when the pension saver dies, although the rules differ depending on their age.
If the saver dies before the age of 75, instead of their unused pension funds being taxed at 55 per cent when inherited, the money can be passed on to a beneficiary as a tax-free lump sum.
If they die aged 75 or over, the person inheriting the unused pension pot can take it as a lump sum taxed at 45 per cent or as income and pay their normal rate of income tax.
The new rules are likely to make pensions even more attractive as a wealth management tool. Contributions attract tax relief at the saver’s normal income tax rate up to an annual limit of £40,000, although this may change, depending on the outcome of the general election in May.
Putting extra money into a pension fund also removes it from an estate for inheritance tax (IHT) purposes and could even bring the value of the estate below the £325,000 threshold at which IHT is levied at 40 per cent.
Moore Thompson and MT Financial Management can provide expert advice on revising current pension, inheritance tax and estate planning arrangements to maximise the benefits of the April changes, working alongside legal advisers to update wills. For more information, please contact us.