On 29th September, the UK Chancellor, George Osborne, announced that the UK government is to abolish the 55% pensions lump sum death tax charge for defined contributions pensions. 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 dies over the age of 75 years, beneficiaries will only pay their marginal tax rate on drawdowns from the pension. A lump sum option is likely to be available, subject to tax charge of 45%.
When an individual dies under the age of 75 years they will be able to give their pension pot to any beneficiary tax free, whether if the pension is already in drawdown or not.
This follows on from an announcement earlier this year that the government will, following amended legislation, remove all remaining tax restrictions on how retirees have access to their pension pots. They will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. The tax rate on cash taken out of defined contribution pension funds withdrawn on retirement (from age 55) will be reduced from 55% down to the member’s marginal rate, with members being able to drawdown on the entire fund as required.
Expatriates need to consider the tax implications in their country of residence. With the local Portuguese tax rules, flexible drawdown can be an attractive option. However the funds withdrawn will form part of your estate for UK inheritance tax purposes, so you need to plan for that.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
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