From April 2015 the 55% tax on pension funds on death is to be abolished. The latest state of the pension’s revolution has made pensions a much more attractive way to save and to pass on, tax free, after death. But the majority of people aged over 55 do not think the government’s pension reforms will impact them, according to a report by Aviva.
From April 2015, retirees will have greater freedom to choose how they access their pension savings. This includes being able to take lump sums without incurring a 55% tax charge on withdrawals above the 25% tax-free limit. Instead, withdrawals will be taxed at the person’s marginal rate of income tax.
Aviva found that 55% of over 55s say they are unaffected by the new pension freedoms while 54% said they have not changed their retirement plans since they were announced.
The survey of more than 1,200 over 55s found:
- just 1 in 10 said the changes have impacted their plans. Of these:
- 59% are likely to take some or all their pot as soon as they can
- 34% might take some as a lump sum to fund their retirement
- 14% said it could be useful to take a lump sum to pay off the mortgage
- 49% of all over 55s do not see an advantage in accessing their pension as a lump sum.
Clive Bolton, managing director of retirement solutions at Aviva, said:
“It’s great that awareness about the changes is high, but people really need to understand that these changes do more than just open up choice – they also change the rules and tax implications on how people use their savings. And with the latest announcement on pension tax changes, the picture for consumers is even more complex.
“It is not simply a choice between taking savings early or choosing a retirement product, there are implications that could leave retirees better or worse off at a time when they need to maximise their savings.”
David Powell, Managing Partner at Booth Ainsworth, explains what this means:
“Currently if someone dies aged 75 or over, without having taken all their defined contribution pension funds, the money is normally taxed at 55%. Only if a pension has never been touched – when neither the 25% tax-free lump sum, nor any income from an annuity or ‘drawdown’ plan has been taken – can pensions be inherited tax free, and then only if a pension member dies before the age of 75.
“From April 2015, the 55% tax charge will be removed. If the pension member dies before the age of 75, whether or not the pension has been taken, it can pass to the beneficiaries free of tax. There will be no tax on the transfer of the money to the new owner and none to pay when he or she makes any withdrawals from the fund. If, however, the member dies at the age of 75 or over, there will be some tax to pay.
“If a member dies at age 75 or over, the 55% tax that currently applies when the pension fund is transferred to the beneficiary will be scrapped and replaced by an income tax charge on any money withdrawn from the pension. This charge will be at the new owner’s top (or ‘marginal’) rate.”
This change is significant and the financial sector is expecting to see a lot more activity in the pension’s arena.
SOURCE: Booth Ainsworth