55% pension tax scrapped

Paul Lewis / 30 September 2014

A major change in the way pension funds are taxed means that people can save up for their own pension, knowing that if they die before they have used the money, heirs can inherit it, often free of all tax.

At the moment pension funds can be passed to heirs free of inheritance tax by leaving the fund in trust. But a 55% pension tax was then applied to it in many cases.

Not any more. As announced by Chancellor George Osborne at the Conservative Party conference, from April 2015 all funds that have not already been used to buy an annuity can be passed on to heirs with much less worry about tax.

The new rules explained

If the pension owner dies before the age of 75 then there will be no tax to pay on the money whoever it is left to. The heirs can cash in the lot or take an income from it free of all tax.

If the pension owner dies aged 75 or more the rules are more complex.

The heirs can take an income from the fund – usually called drawdown – which will be added to their other income and taxed at their marginal rate of tax. That could be zero if the heir is a non-taxpayer and the funds drawn keep them below their personal tax allowance of £10,500.

If they withdraw it all at once as a lump-sum, it will be subject to a tax charge of 45% – equal to the highest rate of income tax. The Treasury says from April 2016 even a lump sum will be taxed as income.

The changes will begin for money taken out of a fund from April 2015, but will apply to deaths earlier than that as long as money has not already been taken out.

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